A project that provides annual cash flows of $12,300 for 7 years costs $59,882 today.
a. If the required return is 7 percent, what is the NPV for this project?
b. Determine the IRR for this project.
a.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=12,300[1-(1.07)^-7]/0.07
=12,300*5.3892894
=66288.26
NPV=Present value of inflows-Present value of outflows
=66288.26-59,882
=$6406.26(Approx).
b.
Let irr be x%
At irr,present value of inflows=present value of outflows
59,882=12,300/1.0x+12,300/1.0x^2+..................+12,300/1.0x^7
Hence x=irr=10%
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