Question

NPV and IRR   Benson Designs has prepared the following estimates for a​ long-term project it is considering. The initial investment is ​$29 comma 510​,

and the project is expected to yield​ after-tax cash inflows of ​$5 comma 000 per year for 9 years. The firm has a cost of capital of 8​%.

a.  Determine the net present value​ (NPV) for the project.

b.  Determine the internal rate of return​ (IRR) for the project.

c.  Would you recommend that the firm accept or reject the​ project?

Answer 1

1)

NPV = Present value of cash inflows - present value of cash outflows

NPV = Annuity * [1 - 1 / (1 + r)^n] / r - Initial investment

NPV = 5,000 * [1 - 1 / (1 + 0.08)^9] / 0.08 - 29,510

NPV = 5,000 * [1 - 0.500249] / 0.08 - 29,510

NPV = 5,000 * 6.246888 - 29,510

NPV = $1,724.44

2)

IRR:

Internal rate of return = 9.39%

3)

We will recommend the project as the NPV is positive ans IRR is greater than the cost of capital