Question

What is the discount rate at which the following cash flows have a NPV of $0? Answer in %, rounding to 2 decimals. Year 0 cash flow = -160,000 Year 1 cash flow = 45,000 Year 2 cash flow = 31,000 Year 3 cash flow = 34,000 Year 4 cash flow = 30,000 Year 5 cash flow = 33,000 Year 6 cash flow = 38,000

Answer 1

Ans 8.78%

Discount rate at NPV = 0 is 8.78%

It is calculated using the estimated Net present values at 2 or more discount rate. Here, we have taken 5% and 10% to estimated the point at which NPV = 0.

Project Cash Flows (i) DF@ 5% DF@ 5% (ii) Year - 160000 1 45000 31000 34000 30000 33000 38000 1/((1+5%)^1) 1/((1+5%)^2) 1/((1+5%)^3) 1/((1+5%)^4) 1/((1+5%)^5) 1/((1+5%)^5) 0.952 0.907 0.864 0.823 0.784 0.746 PV of Project ( (i) * (ii)) DF@ 10% PV of Project (i) * (iii)) (1,60,000.00) 1 (1,60,000.00) 42,857.14 0.909 40,909.09 28,117.91 0.826 25,619.83 29,370.48 0.751 25,544.70 24,681.07 0.683 20,490.40 25,856.36 0.621 20,490.40 28,356.19 0.564 21,450.01 19,239.16 NPV (5,495.55) NPV NPV = Ra + NPVa/ (NPVA - NPVb) * (Rb - Ra) 5% + 19239.16 / (19239.16 +5495.55)*5% 8.78%