Question

book contents p to pg go search ebook gc Click here for a description of Table: Questions and Problems 7. 8. Calculating NPV (LO1) For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 11 percent, should the firm accept this project? What if the required return was 25 percent? 9. Calculating NPV and IRR (L01, 5) A project that provides annual cash flows of $17,300 for nine years costs $78,000 today. Is this a good project if the required return is 8 percent? What if it's 20 percent? At what discount rate would you be indifferent between accepting the project and rejecting it? 10. Calculating IRR (LO5) What is the IRR of the following set of cash flows? Cash Flow Year -$16,400 0 7,100 8400 6900 1 2 3 Clinlc horo for a descrintion of Tahle: Ouestions and Problems 10.

Need Question 9 answered!

Answer 1

Solution:

Computation of NPV
			Discount rate 8%		Discount rate 20%
Particulars	Period	Amount	PV Factor	Present Value	PV Factor	Present Value
Cash outflows:
Initial investment	0	$78,000.00	1	$78,000	1	$78,000
Present Value of Cash outflows (A)				$78,000		$78,000
Cash Inflows:
Annual cash inflows	1-9	$17,300.00	6.24689	$108,071	4.03097	$69,736
Present Value of Cash Inflows (B)				$108,071		$69,736
Net Present Value (NPV) (B-A)				$30,071		-$8,264

Project is good if required rate of return is 8%, project is not goods if required rate of return is 20% as NPV is negative.

Let discount rate at which company is indifferent in accepting or rejecting the project = i

Now NPV at i = 0

Present value factor at i = Initial investment / Annual cash inflows = $78,000 / $17,300 = 4.50867

Refer PV factor table at period 9, this factor falls nearest to i = 17%