Question

A project has annual cash flows of $7,500 for the next 10 years and then $6,500 each year for the following 10 years. The IRR of this 20-year project is 11.42%. If the firm's WACC is 10%, what is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent

Answer 1

Sol:

Cash flows = $7500 for next 10 years and $6500 each year for the following 10 years

IRR = 11.42%

WACC = 10%

To compute NPV of the project:

First we have to compute the initial Investment of the project = Present Value (PV) of the annual cash inflows discounted at 11.42%. After finding the initial investment we have to compute NPV of the project.

Computation on initial investment			Computation of NPV of the project
Period	Cash flow	PV factor @11.42%	Present value		Period	Cash flow	PV factor @10%	Present value
0		1	0		0	-56158.50	1	-56158.5025
1	$7,500	0.8975	$6,731.2870		1	$7,500	0.9091	$6,818.1818
2	$7,500	0.8055	$6,041.3633		2	$7,500	0.8264	$6,198.3471
3	$7,500	0.7230	$5,422.1534		3	$7,500	0.7513	$5,634.8610
4	$7,500	0.6489	$4,866.4095		4	$7,500	0.6830	$5,122.6009
5	$7,500	0.5824	$4,367.6265		5	$7,500	0.6209	$4,656.9099
6	$7,500	0.5227	$3,919.9663		6	$7,500	0.5645	$4,233.5545
7	$7,500	0.4691	$3,518.1891		7	$7,500	0.5132	$3,848.6859
8	$7,500	0.4210	$3,157.5921		8	$7,500	0.4665	$3,498.8054
9	$7,500	0.3779	$2,833.9545		9	$7,500	0.4241	$3,180.7321
10	$7,500	0.3391	$2,543.4882		10	$7,500	0.3855	$2,891.5747
11	$6,500	0.3044	$1,978.4208		11	$6,500	0.3505	$2,278.2103
12	$6,500	0.2732	$1,775.6424		12	$6,500	0.3186	$2,071.1003
13	$6,500	0.2452	$1,593.6478		13	$6,500	0.2897	$1,882.8185
14	$6,500	0.2200	$1,430.3068		14	$6,500	0.2633	$1,711.6532
15	$6,500	0.1975	$1,283.7074		15	$6,500	0.2394	$1,556.0483
16	$6,500	0.1773	$1,152.1337		16	$6,500	0.2176	$1,414.5894
17	$6,500	0.1591	$1,034.0457		17	$6,500	0.1978	$1,285.9903
18	$6,500	0.1428	$928.0611		18	$6,500	0.1799	$1,169.0821
19	$6,500	0.1281	$832.9394		19	$6,500	0.1635	$1,062.8019
20	$6,500	0.1150	$747.5673		20	$6,500	0.1486	$966.1836
Initial investment	$56,158.5025		Net present value	$5,324.2288

Therefore net present value (NPV) of the project is rounded off to $5,324

Working