Question

11A. If you install a new air conditioner in your office for $100,000, you will save $20,000 a year in cooling expenses over the next ten years. What is the NPV of the investment when the cost of capital is 8%? NPV = $..... What is the IRR of the investment? IRR ........ . 11B. If you install a new air conditioner in your office for $100,000, you will save $20,000 a year in cooling expenses in perpetuity. What is the NPV of the investment when the cost of capital is 8%? NPV = $......... . What is the IRR of the investment? IRR = ....... ........ ..........%

Answer 1

11 a . Initial Investment =100000
Savings per year =20000
Number of Years =10
Rate =8%
NPV =PV of Savings -Initial Investment =20000*((1-(1+8%)^-10)/8%)-100000=34201.63

IRR using excel Formula =RATE(10,-20000,100000) =15.10%

11 B. NPV of the investment when the cost of capital is 8% =Perpetuity/Rate-Investment =20000/8%-100000 =150000
IRR of the investment =Perpetuity/Initial Investment =20000/100000=20%