1. a. Calculate the IRR for the following project if its cost was $5,000 and the...

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.

Solutions

Expert Solution

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]

jeff jeffy answered 1 year ago

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