Question

11. You are evaluating a proposed project for your company. The project is expected to generate the following end-of-year cash flows:

You have been told you should evaluate this project with an interest rate of 8.00%.

A) What is the NPV?

B) what is the Internal Rate of Return (IRR)

C) Based on the information above: Your group leader has now told you that the risk of the project was understated before. As a result, she tells you to recalculate the project’s NPV with a 12.5% interest rate. What is the project’s new NPV?

Answer 1

Ans a & b)

	0	1	2	3	4	5	6	7	8
Cashflow	$       (3,000.00)	$          300.00	$          300.00	$            600.00	$            600.00	$            800.00	$                800.00	$                800.00	$        700.00
Present Value	$       (3,000.00)	$          277.78	$          257.20	$            476.30	$            441.02	$            544.47	$                504.14	$                466.79	$        378.19
Net Present Value	$            345.88
IRR	10.52%

PV = $345.88

IRR = 10.52%

Ans c)

	0	1	2	3	4	5	6	7	8
Cashflow	$       (3,000.00)	$          300.00	$          300.00	$            600.00	$            600.00	$            800.00	$                800.00	$                800.00	$        700.00
Present Value	$       (3,000.00)	$          266.67	$          237.04	$            421.40	$            374.58	$            443.94	$                394.62	$                350.77	$        272.82
Net Present Value	$          (238.17)

NPV at 12.5% = -$238.17