In: Finance
1.
a. Calculate the IRR for the following project if its cost was $5,000 and the annual expenditures and costs were:
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
2,000 | 2,000 | 2,000 | 2,000 | -1,000 |
-1,000 |
b. Assume a firm's WACC is 10 percent. Calculate the NPV for the following project if its cost was $5,000 and the annual expenditures and costs were:
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
2,000 | 2,000 | 2,000 | 2,000 | -1,000 | -1,000 |
c. Assume you think the expected rate of return is too high. What should you do?
Group of answer choices
Do nothing.
Not enough information to say.
Sell the stock if you own it.
Buy the stock.
a. Guessing the rates between 10% and 13%
IRR using interpolation = Lowest Discount Rate + [NPV at Lower rate /(NPV at Lower Rate - NPV at Higher Rate) * (Difference in rate)]
= 10% + [ 154.34 /(154.34- (-74.13)) * (13-10)]
= 12.03%
Workings:
Year | Cash flows | PV Factor @10% | Discounted cash flows |
0 | -5,000 | 1 | -5000 |
1 | 2000 | 0.9090909 | 1818.181818 |
2 | 2000 | 0.8264463 | 1652.892562 |
3 | 2000 | 0.7513148 | 1502.629602 |
4 | 2000 | 0.6830135 | 1366.026911 |
5 | -1000 | 0.6209213 | -620.9213231 |
6 | -1000 | 0.5644739 | -564.4739301 |
NPV | 154.3356396 |
Year | Cash flows | PV Factor @13% | Discounted cash flows |
0 | -5,000 | 1 | -5000 |
1 | 2000 | 0.8849558 | 1769.911504 |
2 | 2000 | 0.7831467 | 1566.293367 |
3 | 2000 | 0.6930502 | 1386.100325 |
4 | 2000 | 0.6133187 | 1226.637455 |
5 | -1000 | 0.5427599 | -542.759936 |
6 | -1000 | 0.4803185 | -480.3185274 |
NPV | -74.13581235 |
b. NPV = $154. 34
Year | Cash flows | PV Factor @10% | Discounted cash flows |
0 | -5,000 | 1 | -5000 |
1 | 2000 | 0.9090909 | 1818.181818 |
2 | 2000 | 0.8264463 | 1652.892562 |
3 | 2000 | 0.7513148 | 1502.629602 |
4 | 2000 | 0.6830135 | 1366.026911 |
5 | -1000 | 0.6209213 | -620.9213231 |
6 | -1000 | 0.5644739 | -564.4739301 |
NPV | 154.34 |
c. Option ,Buy the stock. [ The stock will be selling at a lower price when the expected rate is too high to attract investors]