Question

In: Finance

ManBearPig TV project has annual cash flows of $8000 for the next 8 years and then...

ManBearPig TV project has annual cash flows of $8000 for the next 8 years and then $12,000 each year for the following 5 years. The IRR of this 13-year project is 14%. If the firm's WACC is 12%, what is the project's NPV?

A.

$4,941
B.

$6,262
C.

$5,183
D.

$5,659
E.

$5,794

Solutions

Expert Solution

Correct Answer =D.5659

IRR means rate at which initial investment is equal to future cash inflows
Let us calculate initial investment
Year Cash Flow PV Factor PV Of Cash Flow
a b c=1/1.14^a d=b*c
1 $           8,000 0.877192982 $             7,017.54
2 $           8,000 0.769467528 $             6,155.74
3 $           8,000 0.674971516 $             5,399.77
4 $           8,000 0.592080277 $             4,736.64
5 $           8,000 0.519368664 $             4,154.95
6 $           8,000 0.455586548 $             3,644.69
7 $           8,000 0.399637323 $             3,197.10
8 $           8,000 0.350559055 $             2,804.47
9 $         12,000 0.307507943 $             3,690.10
10 $         12,000 0.26974381 $             3,236.93
11 $         12,000 0.236617377 $             2,839.41
12 $         12,000 0.207559102 $             2,490.71
13 $         12,000 0.182069388 $             2,184.83
Value of investment $           51,552.88
Let us calculate NPV
Year Cash Flow PV Factor PV Of Cash Flow
a b c=1/1.12^a d=b*c
0 $ -51,552.88 1 $         -51,552.88
1 $           8,000 0.892857143 $             7,142.86
2 $           8,000 0.797193878 $             6,377.55
3 $           8,000 0.711780248 $             5,694.24
4 $           8,000 0.635518078 $             5,084.14
5 $           8,000 0.567426856 $             4,539.41
6 $           8,000 0.506631121 $             4,053.05
7 $           8,000 0.452349215 $             3,618.79
8 $           8,000 0.403883228 $             3,231.07
9 $         12,000 0.360610025 $             4,327.32
10 $         12,000 0.321973237 $             3,863.68
11 $         12,000 0.287476104 $             3,449.71
12 $         12,000 0.256675093 $             3,080.10
13 $         12,000 0.22917419 $             2,750.09
NPV $                   5,659

jeff jeffy answered 1 year ago
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