Suppose we are asked to decide whether a new project should be launched. We expect that...

Suppose we are asked to decide whether a new project should be launched. We expect that cash flows over the five-year life of the project will be $350 million in the first two years, $375 million in the next two years, and $385 million in the last year. The initial investment is expected to cost $995 million. The firm’s required return is 10%. Using a financial calculator, compute the NPV and IRR of this project.

Solutions

Expert Solution

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

Press the CF button.
CF0= -$995,000,000. 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 NPV button and enter the required rate of return of 10%.
Press enter after that. Press the down arrow and CPT buttons to get the net present value.

Net present value at 10% required rate of return is $389,365,822.

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

Press the CF button.
CF0= -$995,000,000. 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 button and CPT keys to get the IRR of the project.

The IRR is 24.07%.

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

jeff jeffy answered 6 months ago

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