Question

NPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is

$27 comma 69027,690 ,

and the project is expected to yield after-tax cash inflows of

$6 comma 0006,000

per year for

77

years. The firm has a cost of capital of

1212 %.

a. Determine the net present value (NPV) for the project.

b. Determine the internal rate of return (IRR) for the project.

c. Would you recommend that the firm accept or reject the project?

Answer 1

a.Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$27,690. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow, press the NPV button and enter the cost of capital of 12%.
• Press the down arrow and CPT buttons to get the net present value.

Net present value of cash flows at 12% cost of capital is -$307.46.

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

• Press the CF button.
• CF0= -$27,690. It is entered with a negative sign since it is a cash outflow.
• 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 the project is 11.65%.

c.I would recommend to reject the project since it has a negative net present value.

In case of any query, kindly comment on the solution.