A project that provides annual cash flows of $14,700 for 9 years costs $81,395 today. A)...

A project that provides annual cash flows of $14,700 for 9 years costs $81,395 today.

A) If the required return is 4 percent, what is the NPV for this project?

B)Determine the IRR for this project.

Solutions

Expert Solution

a) NPV = -Initial investment + Present value of cash flows

NPV = -$81,395 + $14,700/1.04 + $14,700/1.04^2 + $14,700/1.04^3 + $14,700/1.04^4 + $14,700/1.04^5 + $14,700/1.04^6 + $14,700/1.04^7 + $14,700/1.04^8 + $14,700/1.04^9 = $27,904.37

b) The IRR is the interest rate that makes the NPV of the project equal to zero. The IRR for this project is:

0 = -$81,395 + $14,700/(1 + IRR) + $14,700/(1 + IRR)^2 + $14,700/(1 + IRR)^3 + $14,700/(1 + IRR)^4 + $14,700/(1 + IRR)^5 + $14,700/(1 + IRR)^6 + $14,700/(1 + IRR)^7 + $14,700/(1 + IRR)^8 + $14,700/(1 + IRR)^9

IRR = 11.00%

jeff jeffy answered 1 year ago

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