Question

1: When projects are mutually exclusive, you should choose the project with the:

Assuming an interest rate of 14%, what is the net present value of an investment with the cash flows indicated in the table?

CF0 -$193,000  

CF1 $50,235  

CF2 $62,850  

CF3 $62,850  

CF4 $48,910  

CF5 $87,415

2- Assuming a firm has unlimited access to funds, what is the proper accept or reject decision when using internal rate of return (IRR)?

please make sure so I can read your handwriting, Thank you.

Answer 1

1.Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$193,000.  It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the interest rate of 14%.
• Press the down arrow and CPT buttons to get the net present value.  

Net present value of cash flows at 14% interest rate is $16,208.04.

When projects are mutually exclusive, you should choose the project with the largest net present value.

2.If a firm has unlimited access to fund and uses internal rate of return, the project acceptance decision depends on if the internal rate of return is lesser than the cost of capital of the project.