Question

A project that costs $3,700 to install will provide annual cash flows of $1,150 for each of the next 6 years.

a. What is NPV if the discount rate is 11%? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

a) Calculation of NPV:
Particulars	Time	PVf @11%	Amount	PV
Cash Outflows	-	1.00	-3,700.00	-3,700.00
PV of Cash outflows = PVCO				-3,700.00
Cash inflows	1.00	0.9009	1,150.00	1,036.04
Cash inflows	2.00	0.8116	1,150.00	933.37
Cash inflows	3.00	0.7312	1,150.00	840.87
Cash inflows	4.00	0.6587	1,150.00	757.54
Cash inflows	5.00	0.5935	1,150.00	682.47
Cash inflows	6.00	0.5346	1,150.00	614.84
PV of Cash Inflows =PVCI				4,865.12
NPV= PVCI - PVCO				1,165.12
NPV is $1165.12
b) Calculation of IRR
Statement showing NPV
Particulars	Time	PVf @22%	Amount	PV
Cash Outflows	-	1.00	-3,700.00	-3,700.00
PV of Cash outflows = PVCO				-3,700.00
Cash inflows	1.00	0.8197	1,150.00	942.62
Cash inflows	2.00	0.6719	1,150.00	772.64
Cash inflows	3.00	0.5507	1,150.00	633.31
Cash inflows	4.00	0.4514	1,150.00	519.11
Cash inflows	5.00	0.3700	1,150.00	425.50
Cash inflows	6.00	0.3033	1,150.00	348.77
PV of Cash Inflows =PVCI				3,641.96
NPV= PVCI - PVCO				-58.04
Internal rate of return=	Lower rate+	(Lower rate NPV)	*(Higher rate- lower rate)
		(lowe rate NPV- Higher rate NPV)
	11%+	1165.12	*(22%-11%)
		(1165.12+58.04)
	11%+10.48%
Internal Rate of return is 21.48%
So highest discount rate is 21.48%