Question

The YayForSemesterBreak Company wants to calculate the NPV and IRR on the following project: Cost is $17,800 today, with end-of-year cash flows of $8,000, $8,000, and $7,000, Years 1 through 3 respectively for three years. Assume the cost of capital is 8%. SHOW ALL WORK on the TI BAII Plus Calculator FOR FULL CREDIT. a) NPV? b) IRR? c) Do you accept or reject the project, and why?

Answer 1

NPV = PV of cash Inflows - PV of Cash Outflows

Year	CF	PVF @8%	Disc CF
0	$ -17,800.00	1.0000	$ -17,800.00
1	$    8,000.00	0.9259	$      7,407.41
2	$    8,000.00	0.8573	$      6,858.71
3	$    7,000.00	0.7938	$      5,556.83
NPV			$      2,022.94

IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash Outflows

Year	CF	PVF @14%	Disc CF	PVF @15%	Disc CF
0	$ -17,800.00	1.0000	$ -17,800.00	1.0000	$ -17,800.00
1	$    8,000.00	0.8772	$      7,017.54	0.8696	$    6,956.52
2	$    8,000.00	0.7695	$      6,155.74	0.7561	$    6,049.15
3	$    7,000.00	0.6750	$      4,724.80	0.6575	$    4,602.61
NPV			$            98.08		$      -191.72

IRR = Rate at which least +ve NPV + [ NPV at that Year / Change in NPV due to 1% inc in Disc Rate ] * 1%

= 14% + [ 98.08 / 289.80 ] * 1%

= 14% + 0.34%

= 14.34%

Part C:

As it has +ve NPV & IRR > COst of Capital, Project can be accepted.