Question

In: Finance

Annual cash flows: Year 0 $(104,000,000) Year 1 $250,000,000 Year 2 $(150,000,000) Required return 16% Output...

Annual cash flows:
Year 0 $(104,000,000)
Year 1 $250,000,000
Year 2 $(150,000,000)
Required return 16%
Output area:
NPV $42,806.18
Accept/Reject Accept
IRR 15.38%
25.00%
Required return @ Maximum NPV
Maximum NPV
  1. Using Excel, plot a graph that demonstrates the relationship between the discount rate and the NPV

    of the project. Be sure to label the graph where appropriate so that it is self-explanatory to your client. Hint: In the spreadsheet, you will need to first construct a table that contains the NPV of the project with varies of discount rate, and then use that table to construct a plot.

  2. Basedonthegraphyouplotinquestion4, comment on what valuable information can you derive from the graph, and how you could use this graph to make an investment decision for the firm?

Solutions

Expert Solution

Table of NPV at various rate

Rate NPV
0% ($4,000,000)
3% ($2,670,940)
6% ($1,650,409)
9% ($894,201)
12% ($364,796)
15% ($30,246)
18% $136,742
21% $159,552
24% $58,273
27% ($149,792)
30% ($449,704)

This shows that the NPV first increases with an increase in the interest rates. However beyond a certain point it starts decreasing. So the discount rate needs to be estimated to understand if the investment is useful.


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