Question

In: Finance

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.


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