Question

You are attempting to reconstruct a project analysis of a co-worker who was fired for flunking FI 3300. You have found the following information:

The IRR is 16.15%.

The project life is 6 years.

The initial cost is $9175.

In years 1, to 4 you will receive cash inflows of $2094 each year.

You know the cash flows in years 5 and 6 are equivalent, but the amount is not on file.

The appropriate discount rate is 5.66%.

What is the NPV of the Project?

Answer 1

Answer: -

NPV of the project is $3736

Explanation: -

Step 1: - calculation of equivalent cash flows from years 5 and 6

We know that the IRR is the discount rate at which NPV is equal to zero.

Therefore,

[Cash flow of years 1 to 4 * (PVIFA 16.15%, 4)] + [equal Cash flow of years 5 and 6 * ((PVIF 16.15%, 5) + (PVIF 16.15, 6))] - initial cost = 0

By substituting values, we get

[$2094 * 2.7898] + [equal Cash flow of years 5 and 6 * (.473 +.407)] - $9175 = 0

$5842 + [equal Cash flow of years 5 and 6 * .88] = $9175

equal Cash flow of years 5 and 6 * .88 = $9175 - $5842

equal Cash flow of years 5 and 6 = $3333 / .88

equal Cash flow of years 5 and 6 = $3787.5

Step 2: - calculation of NPV

NPV = [Cash flow of years 1 to 4 * (PVIFA 5.66%, 4)] + [equal Cash flow of years 5 and 6 * ((PVIF 5.66%, 5) + (PVIF 5.66%, 6))] - initial cost

NPV = [$2094 * 3.4926] + [$3787.5 * (.759 +.719)] - $9175

NPV = $7313.5 + $5598 - $9175

NPV = $3736