Question

QUESTION 28 5 point (5 points) A capital project has an initial investment of $100,000 and cash flows in years 16 of 525.000, 515.000, 550,000, 110,000, $10,000, and 500,000, respectively. Given a 15 percent cost of capital (a) compute the net present value • (b) compute the internal rate of return 1) should the project be accepted? Why or why not? 30

Answer 1

Initial investment=100000
Cash flows are:
Year 1:25000
Year 2:15000
Year 3:50000
Year 4:10000
Year 5:10000
Year 6:60000

Given that the cost of capital is 15%

We can calculate the NPV and IRR using excel.

1 Years 0 1 H Cash flows -100000 25000 15000 50000 10000 10000 60000 10 NPV= 11 IRR= 2586.05 15.88%

Excel formulas used:

1 Years 20 31 Not in Cash flows -100000 25000 15000 50000 10000 10000 60000 10 NPV= 11 IRR= =H2+NPV(15%, H3:H8) =IRR(H2:H8)

Part a:
NPV of the cash flows=$2586.05

Part b:
IRR of the cash flows=15.88%

Part c:
Yes, the project should be accepted because it is generating positive NPV (also the IRR is greater than the cost of capital) and will increase the shareholders' wealth