Question

A project that provides annual cash flows of $17,000 for 6 years costs $60,000 today.

a. If the required return is 10 percent, what is the NPV for this project?

b. Determine the IRR for this project.

Answer 1

a)

NPV = - Cash Outlay +  Cashflow per year / (1 + Required rate)^period

NPV = -$60,000 + $17,000 / (1 + 10%)¹ +...+ $17,000 / (1 + 10%)⁶

Using the PVIFA = (1 - (1 + interest rate)^{-no of periods}) / interest rate

NPV = -$60,000 + $17,000 * (1 - (1 + 10%)^-6) / 10%

NPV = $14,039.43

b)

NPV = - Cash Outlay +  Cashflow per year / (1 + IRR)^period

To calculate IRR we need to set the NPV = 0

0 = -$60,000 + $17,000 / (1 + IRR)¹ +...+ $17,000 / (1 + IRR)⁶

Using the Texas Instruments BA 2 plus calculator

PRESS CF,

CFo = -60,000, Press ENTER,

C01 = 17,000, Press ENTER,

F01 = 6, Press ENTER,

Press IRR, Press CPT

IRR = 17.6479%