Question

Your brother wants to borrow 10,000 from you. He has offered to pay you back $13,250 in a year. If the cost of capital of this investment opportunity is 9% what is its NPV? Should you undertake the investment opportunity? calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

If the cost of capital of this investment opportunity is 12 %   ------

What is its​ NPV? The NPV of the investment is ​$ ______________

Should you undertake the investment​ opportunity? Since the NPV is positive / negative / equal I should take / not take it.

Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

The IRR is __________ %

The maximum deviation allowable in the cost of capital is: ___%

Answer 1

Project
Discount rate	0.09
Year	0	1
Cash flow stream	-10000	13250
Discounting factor	1	1.09
Discounted cash flows project	-10000	12155.96
NPV = Sum of discounted cash flows
NPV Project =	2155.96
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Accept project as NPV is positive
Project
IRR is the rate at which NPV =0
IRR	0.325
Year	0	1
Cash flow stream	-10000	13250
Discounting factor	1	1.325
Discounted cash flows project	-10000	10000
NPV = Sum of discounted cash flows
NPV Project =	3.64967E-06
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	32.50%
Max deviation = 32.5-9=23.5%