Question

An investment has an installed cost of $566,382. The cash flows over the four-year life of the investment are projected to be $195,584, $239,318, $187,674, and $155,313. If the discount rate is zero, what is the NPV? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) NPV $ If the discount rate is infinite, what is the NPV? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) NPV $ At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Discount rate %

Answer 1

NPV at Zero Discount Rate
At zero discount rate, the NPV shall be equal to thetotal cashflows.
In the given question, total cash flow = -566382+195584+239318+187674+155313
$              211,507.00
Thus NPV will be $2,11,507
NPV at infinite discount rate
If the require rate of return is infinite, the present valaue of future cash flows will have no value.
Therefore, NPV shall be equal th the cash flow today
In the given qustion, today investmentof Rs.$566382 is made
Therefore, NPV shall be equal to = -$566382
Discount Rate, where NPV = Zero
Intt. Rate at which NPV is zero is IRR.
We will assume different discount rates to calculate the discount rate
	Cash Flow	Year	PFV @ 15%	PV	PVF@14%	PV
Cash Outflow	-566382	0	1	$ (566,382.00)	1	$                (566,382.00)
Cash Inflow	195584	1	0.86956522	$    170,073.04	0.877193	$                  171,564.91
Cash Inflow	239318	2	0.75614367	$    180,958.79	0.769468	$                  184,147.43
Cash Inflow	187674	3	0.65751623	$    123,398.70	0.674972	$                  126,674.60
Cash Inflow	155313	4	0.57175325	$      88,800.71	0.59208	$                     91,957.76
			NPV	$      (3,150.75)		$                       7,962.71
	NPV @15%	$ (3,150.75)
	NPV @14%	$   7,962.71
	By interlocating = 14% + (3150.75)/(7962.71+3150.75)
		= 14.7%
Therefore at 14.7% discount NPV will be zero