Question

In: Finance

4. A project has the following cash flows Year Cash Flow 0 58000 1 -34000 2...

4. A project has the following cash flows

Year Cash Flow
0 58000
1 -34000
2 -45000

a) What is the IRR for this project? If the required rate of return is 12%, should the firm accept the project?

b) What is the NPV for this project? What is the NPV for the project if the required rate of return is 0%? 24%? What is going on here? Sketch the NPV profile to help with your answer

Solutions

Expert Solution

a. Internal Rate of Return is the measure of the investment's rate of return. It is the point at which the present value of all cash outflows is equal to all cash inflows.

According to the problem,

or r = 22.14%

Since the IRR is greater than the required rate of return, the project is not profitable and hence, the firms should not accept the project.

b) Net Present Value is the present value of all cash flows depends on the intervals of time between now and cash flow. It is the Present Value of Cash Inflows minus Present Value of Cash Outflows.

At 12% rate of return,

NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= 58000 - 34000/1.12 - 45000/1.12^2

= - 8230.87

At 0% rate of return,

NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= 58000 - 34000 - 45000

= -$ 20,000

At 24%rate of return,

NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= 58000 - 34000/1.24 - 45000/1.24^2

= $ 1314.26

jeff jeffy answered 2 years ago
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