Question

NPV

Project K costs $70,000, its expected cash inflows are $12,000 per year for 12 years, and its WACC is 10%. What is the project's NPV? Round your answer to the nearest cent.

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IRR

Project K costs $52,894.84, its expected cash inflows are $11,000 per year for 11 years, and its WACC is 10%. What is the project's IRR? Round your answer to two decimal places.

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Answer 1

Let us first understand what NPV and IRR means.

1. NPV: NPV means Net Present Value. It's formula is :- NPV= (PV of Cash Inflows - PV of Cash outflow)
2. IRR: IRR means the internal rate of return. It is that discounting rate at which PV of inflows are equal to PV of outflows. We use Interpolation method to arrive at the IRR. In this method we will use trail & error method , to arrive at that rate where PV of inflows is equal to the outflow. Points to keep in mind while using this method:-

• The Gap between any two assumed rates should not be more than 2%
• Outflow should be in between the two Present Values calculated at the rates assumed.

Please refer to tha attachment for the answer.