Question

A project that provides annual cash flows of $2,800 for 6 years costs $9,800 today.

   

Required:
(a)	If the required return is 9 percent, what is the NPV for this project?
	(Click to select)$2,760.57$3,036.63$3,312.69$3,643.96$2,484.51

   

(b)	Determine the IRR for this project.
	(Click to select)17.97%19.77%21.57%23.72%16.18%

  

Answer 1

NPV = Present Value of Cash Inflows - Present Value of Cash Outflows

= 2800 *1/(1.09) +2800*1/(1.09)^2 +2800*1/(1.09)^3 +2800*1/(1.09)^4 +2800*1/(1.09)^5 +2800*1/(1.09)^6 - 9800

= $2760.57

IRR = Internal Rate of Return = At which NPV becomes equal to Zero

Hence 9800 = 2800 *1/(1 + R)+2800*1/(1 + R)^2 +2800*1/(1 + R)^3 +2800*1/(1 + R)^4 +2800*1/(1 + R)^5 +2800*1/(1 + R)^6

Solving IRR is coming approx to 17.97%