Question

1. First Part: A magazine publisher wants to launch a new magazine geared to college students. The project's initial investment is $66. The project's cash flows that come in at the end of each year are $24 for 6 consecutive years beginning one year from today. What is the project's NPV if the required rate of return is 13%?

Answer #1: $

Place your answer in dollars and cents without the use of a dollar sign or comma. If applicable, a negative answer should have a "minus" sign in front of the number. Work your analysis out to at least 4 decimal places of accuracy.

Second Part
Based upon the NPV decision rule, should the company accept or reject the project?

Answer #2:(Accept or Reject)
Place your aswer as the word "accept" or the word "reject".

2. A research division of a large consumer electronics company has developed a new type of mp3 player. The project will require an immediate cash outflow of $1,665,321. The new project is expected to produce cash flows of $500,000 per year for 4 consecutive years beginning at the end of year one. What is this projects internal rate of return?

3. A manufacturer of backpacks plans to introduce a new line. Equipment and production costs will be incurred immediately and will total $7,272,727. The company expects to earn a profit of $20 per backpack, and sales are estimated to be 100,000 in the first year (assume that the cash flow comes in at the end of the year). Sales are then expected to grow by 10% per year in each of the next three years (in year 2, year 3, and year 4) but the price is expected to remain at $20 throughout. What is the internal rate of return of this project?

%

Place your answer in percentage form with no percentage sign. That is, if your answer is four point eight eight percent, you should enter that value as 4.88.

Should the company produce the backpacks if the required rate of return is 12%?
(Yes or No)

Answer 1

1. NPV = 29.9412 Note : PV Factor = 1/1+13^1....6 (No of Years)

NPV
Year	Cash flow	PV Factor at 13%	PV Value
0	-66	1	-66
1	24	0.8850	21.2389
2	24	0.7831	18.7955
3	24	0.6931	16.6332
4	24	0.6133	14.7196
5	24	0.5428	13.0262
6	24	0.4803	11.5276
		NPV	29.9412

2. Aproximator IRR formula is = Lower Rate + [ Possitive / Posstive NPV - Negetive NPV ] x Higher Rate - Lower Rate

Low year rate NPV 5%
Year	Cash flow	PV Factor	PV Value
0	-1665321	1	-1665321
1	500000	0.952381	476190.5
2	500000	0.907029	453514.7
3	500000	0.863838	431918.8
4	500000	0.822702	411351.2
		NPV +	107654.3

Decision: Since NPV is positive we can accept the project

Higher Rate NPV 10%
Year	Cash flow	PV Factor	PV Value
0	-1665321	1	-1665321
1	500000	0.909091	454545.5
2	500000	0.826446	413223.1
3	500000	0.751315	375657.4
4	500000	0.683013	341506.7
		NPV -	-80388.3

IRR = 5+ [ 107654.3/107654.3 - (-80388.3) ] 10 - 5

= 5 + [ 107654.3 / 188042.5 ] x 5

= 5+ [0.572499] 5

= 5+ 2.86

IRR=7.86

Question Number 2 need to solved as above by taking lower NPV and Higher NPV formula remains same that is

Aproximator IRR formula is = Lower Rate + [ Possitive / Posstive NPV - Negetive NPV ] x Higher Rate - Lower Rate

Lower Rate at 5%
Year	Cash flow	PV Factor	PV C/F
0	-7272727	1	-7272727
1	2000000	0.952381	1904762
2	2200000	0.907029	1995465
3	2420000	0.863838	2090487
4	2662000	0.822702	2190034
		NPV	908020.7

High rate at 12%
Year	Cash flow	PV Factor	PV C/F
0	-7272727	1	-7272727
1	2000000	0.892857	1785714
2	2200000	0.797194	1753827
3	2420000	0.71178	1722508
4	2662000	0.635518	1691749
		NPV	-318929

IRR = 5+ [ 908020.7/908020.7 - (-318929) ] 12-5

= 5 + [ 908020.7 / 1226950 ] x 7

= 5+ [0.740060] 7

= 5+ 5.180445

IRR=10.36089

Answer for Question Number 3. If the discount Rate is 12%

NPV will be

Year	Cash flow	PV Factor	PV C/F
0	-7272727	1	-7272727
1	2000000	0.892857	1785714
2	2200000	0.797194	1753827
3	2420000	0.71178	1722508
4	2662000	0.635518	1691749
		NPV	-318929

Decision: Since NPV is negative project will be rejected.