Question

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?

Answer 1

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