Question

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

2. 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.

3. 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?

Answer 1

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.