Question

In: Finance

Use the following cash flows to calculate the NPV, IRR, PI. The firm's WACC is 6%....

Use the following cash flows to calculate the NPV, IRR, PI. The firm's WACC is 6%. Y0 = ($1,500), Y1= $600, Y2 = $700, Y3 = $500. Determine which statement is true.

a) NPV = 108.84; IRR = 9.99%; PI = 1.07

b) NPV = 108.84; IRR = 10.47%; PI = 1.07

c) NPV = 108.84; IRR = 9.99%; PI = 0.0726

d) NPV = 300; IRR = 9.99%; PI = 1.20

Please Explain

Solutions

Expert Solution

a) NPV = 108.84; IRR = 9.99%; PI = 1.07

Working:

NPV $ 108.84
IRR 9.99%
PI 1.07
working:
a.
Year Cash flow Discount factor@6% Pesent Value
1 $         600 0.943 $          566.04
2 $         700 0.890 $          623.00
3 $ 500 0.840 $          419.81
Total $       1,608.84
Less:Costs of Project $       1,500.00
Net Present Value $          108.84
b. PI (Profitability Index) = $ 1,608.84 / $ 1,500.00
= 1.07
c. At 10%
Year Cash flow Discount factor@10% Pesent Value
1 $         600 0.909 $          545.45
2 $         700 0.826 $          578.51
3 $         500 0.751 $          375.66
Total $       1,499.62
Less:Costs of Project $       1,500.00
Net Present Value $             -0.38
IRR = 6%+(10%-6%)*(108.84/(108.84+0.38))
= 9.99%
IRR is the rate at which NPV is zero.

jeff jeffy answered 3 years ago
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