Question

Problem # 10. NPV:

A project costs 3,000 to install will provide to install will provide annual cash flows of 800 for each of the next 6 years.

A. What is the NPV if the discount rate is 10%

B. How high can the discount rate be before you would reject the project?

How to do in excel also

Answer 1

	CASH FLOW FROM THE PROJECT
	Answer =A)
	CALCULATION OF NET PRESENT VALUE OF PROJECT
	Years	Cash Flows	PVF @10%	Present Value
	0	-$3,000	1	-$3,000.00
	1	$800	0.9091	$727.27
	2	$800	0.8264	$661.16
	3	$800	0.7513	$601.05
	4	$800	0.6830	$546.41
	5	$800	0.6209	$496.74
	6	$800	0.5645	$451.58
	7	$800	0.5132	$410.53
	8	$800	0.4665	$373.21
	Total
				$1,267.94
	Answer = B)
	IRR is the maximum discount rate which give us the NPV is Zero
	It means if the discount rate is above the IRR rate than we can reject the project
	CALCULATION OF THE IRR OF THE PROJECT
	First we calculate randomly present value with @ 20% discounting rate
	Years	Cash Flows	PVF @20%	Present Value
	0	-$3,000	1	-$3,000.00
	1	$800	0.8333	$666.67
	2	$800	0.6944	$555.56
	3	$800	0.5787	$462.96
	4	$800	0.4823	$385.80
	5	$800	0.4019	$321.50
	6	$800	0.3349	$267.92
	7	$800	0.2791	$223.27
	8	$800	0.2326	$186.05
		Net Present Value =		$69.73
	With PVF of 20 % we are getting positive NPV =			$69.73
	So now we will try to calculate NPV with 21%
	Years	Cash Flows	PVF @21%	Present Value
	0	-$3,000	1	-$3,000.00
	1	$800	0.8264	$661.16
	2	$800	0.6830	$546.41
	3	$800	0.5645	$451.58
	4	$800	0.4665	$373.21
	5	$800	0.3855	$308.43
	6	$800	0.3186	$254.90
	7	$800	0.2633	$210.67
	8	$800	0.2176	$174.10
		Net Present Value =		-$19.54
	With PVF of 21 % we are getting Negative NPV =			-$19.54
	In the given case the pv with 20% is coming to positive means the present value is more
	then 20 % but with 21 % Present value cash flow become negative so the present value
	is between 20% and 21 %
	So the difference in both % net present value is =			$69.73	-	-$19.54
	Total is become =			$89.27
	So , the difference % =			$69.73	"/"By	$89.27
	So , the difference % =			0.78
	So, the IRR =			20.78%
	Answer =
	It means if the discount rate is more than 20.78% than we can reject the project