Question

In: Finance

11. You are evaluating a proposed project for your company. The project is expected to generate...

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

Please solve for below cash flows: 0------- -$3000 1--------- $300 2----------$300 3---------- $600 4---------- $600 5----------- $800 6----------- $800 7------------$800 8----------- $700

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?

Solutions

Expert Solution

A)

NPV @ 8% = $345.88

We can accept the project. NPV at 8% discounting rate coming to be positive hence, acceptable NPV.

Rate = R = 8.00%

Year

Cash flows

Discount factor = Df = 1/(1+R)^Year

Present value = Df x Cash flows

0

-$3,000.00

1.0000

-$3,000.00

1

$300.00

0.9259

$277.78

2

$300.00

0.8573

$257.20

3

$600.00

0.7938

$476.30

4

$600.00

0.7350

$441.02

5

$800.00

0.6806

$544.47

6

$800.00

0.6302

$504.14

7

$800.00

0.5835

$466.79

8

$700.00

0.5403

$378.19

Total of Present Value = NPV=

$345.88

B)

IRR can derived by using trial and error, at 10.5157% or 10.52% rate we are getting all cash flow near to zero which means it is appropriate rate of return for the project.

IRR = 10.52%

Rate = R = 10.52%

Year

Cash flows

Discount factor = Df = 1/(1+R)^Year

Present value = Df x Cash flows

0

-$3,000.00

1.0000

-$3,000.00

1

$300.00

0.9048

$271.44

2

$300.00

0.8187

$245.61

3

$600.00

0.7408

$444.46

4

$600.00

0.6702

$402.15

5

$800.00

0.6065

$485.16

6

$800.00

0.5487

$438.98

7

$800.00

0.4965

$397.20

8

$700.00

0.4492

$314.46

Total of Present Value = NPV=

-$0.54

C)

New NPV @ 12.50% = -$238.17

Hence, project at negative NPV is not acceptable we can’t accept this project if rate is 12.5%

Rate = R = 12.50%

Year

Cash flows

Discount factor = Df = 1/(1+R)^Year

Present value = Df x Cash flows

0

-$3,000.00

1.0000

-$3,000.00

1

$300.00

0.8889

$266.67

2

$300.00

0.7901

$237.04

3

$600.00

0.7023

$421.40

4

$600.00

0.6243

$374.58

5

$800.00

0.5549

$443.94

6

$800.00

0.4933

$394.62

7

$800.00

0.4385

$350.77

8

$700.00

0.3897

$272.82

Total of Present Value = NPV=

-$238.17


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