Question

Suppose you are offered a project with the following payments

year cash flows

0 $10,600

1 -4,900

2 -4,400

3 -3,400

4 -2,700

A/ what is the IRR of this offer?

B/ If the appropriate discount rate is 14 percent, should you accept this offer?

C/ If the appropriate discount rate is 24 percent, should you accept the offer?

D-1/ What is the NPV of the offer if the appropriate discount rate is 14 percent?

D-2? What is the NPV of the offer if the appropriate discount rate is 24 percent?

Answer 1

A.Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= $10,600.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of project is 18.94%.

B.I should accept the offer if the discount rate is 14% since the internal rate of return is higher than the cost of capital.

C. I should not accept the offer if the discount rate is 24% since the internal rate of return is lower than the cost of capital.

D-1. Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= $10,600.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 14%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of the offer is -$977.42.

D-2. Net present value is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= $10,600.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 24%.
• Press enter after that. Press the down arrow and CPT buttons to get the net present value.

The net present value of the offer is $861.4992 $861.50

In case of any query, kindly comment on the solution