Question

Inputs
discount rate	22.50%
revenue growth rate	2.50%
Initial investment	$800,000.00
revenue (year 1)	$190,000.00
(a) complete table below (8 pts)
	Cash flows
year 0
year 1
year 2
year 3
year 4
year 5
year 6
(b) Calculate NPV and IRR (8 pts)
NPV
IRR
(c) Would you accept in this project? Explain your answer (3 pts)
(d) what is the minimum revenue growth rate that would be consistent with
accepting this project? (7 pts)
Answer:
(e) Explain how to answer this question using Solver (10 pts)
In Solver (fill in or leave empty appropriate cells below)
Set objective:
To:
By Changing variable cells:
Subject to the constraints:

Answer 1

a)

Revenue for year 2 = Revenue for year 1 * ( 1+ revenue growth rate )

Revenue for year 3 = Revenue for year 2 * ( 1+ revenue growth rate )

and so on

b)

NPV = sum of all the present values

NPV = ($179,044.37)

IRR can be calculated using IRR() function in excel

IRR = 12.88%

c)

Since NPV < 0 and IRR is less than discount rate, we will reject this project

d)

Revenue growth rate which will make the NPV positive, we will use that rate

So if you see, by revenue growth rate of 15.0448%, NPV is 0, so any growth rate above this is acceptable, so minimum rate = 15.0448%

e)

In solver,

Set NPV = 0

By changing value = revenue growth rate (cell E5)

you will get the answer

We do not need any constraint as such since it is simple problem