Question

A large stake in an Alpacca farming business can be purchased for $21,160. The Alpacca farm is expected to return $2,000 in perpetuity per half-year in arrears. The required rate of return on investments of this risk is j2 = 18%.

a)What is the investment's net present value? Give your answer in dollars and cents to the nearest cent. NPV = $_______

b)What is the internal rate of return (IRR)? Give your answer as a nominal percentage per annum to 3 decimal places. IRR = ______% pa

Answer 1

-21160Investment amount = 21160

Perpetual return per half year = 2000

J2= 18%

So Semiannual or half year rate = 18%/2= 9%

Present Value of cash inflows in perpetuity = Cash flows half year/half year rate

=2000/9%

=22222.22222

NPV = PV of cash inflows - Investment

=22222.22222

=1062.222222

So NPV of Investment is $1062.22

B. IRR calcultion:

IRR is that rate at which Present Value of cash inflows is equal to Investment.

Investment amount = PV of cash inflows or Inflows/r

21160 = 2000/r

R = 2000/21160

=0.09451795841

Nominal annual irr J2= 0.09451795841*2=

0.1890359168 or 18.90%

So IRR of Investment is 18.90%