Question

A project has annual cash flows of $6,000 for the next 10 years and then $9,000 each year for the following 10 years. The IRR of this 20-year project is 12.01%. If the firm's WACC is 9%, what is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Annual Cash Flow for first 10 years = $6,000
Annual Cash Flow for next 10 years = $9,000

Internal Rate of Return = 12.01%

Initial Investment = $6,000/1.1201 + $6,000/1.1201^2 + … + $6,000/1.1201^9 + $6,000/1.1201^10 + $9,000/1.1201^11 + $9,000/1.1201^12 + … + $9,000/1.1201^19 + $9,000/1.1201^20
Initial Investment = $6,000 * (1 - (1/1.1201)^10) / 0.1201 + $9,000 * (1/1.1201)^10 * (1 - (1/1.1201)^10) / 0.1201
Initial Investment = $6,000 * 5.647911 + $9,000 * 1.816853
Initial Investment = $50,239.14

WACC = 9.00%

Net Present Value = -$50,239.14 + $6,000/1.09 + $6,000/1.09^2 + … + $6,000/1.09^9 + $6,000/1.09^10 + $9,000/1.09^11 + $9,000/1.09^12 + … + $9,000/1.09^19 + $9,000/1.09^20
Net Present Value = -$50,239.14 + $6,000 * (1 - (1/1.09)^10) / 0.09 + $9,000 * (1/1.09)^10 * (1 - (1/1.09)^10) / 0.09
Net Present Value = -$50,239.14 + $6,000 * 6.417658 + $9,000 * 2.710888
Net Present Value = $12,664.80