Question

In: Finance

Suppose you are offered a project with the following payments year cash flows 0 $10,600 1...

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?

Solutions

Expert Solution

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

jeff jeffy answered 1 year ago

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