You observe the following project in the market. Assume your cost of capital is 10% A)...
You observe the following project in the market. Assume your cost of capital is 10%
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A) Should you take or reject this project?
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B) Calculate the NPVs of each hypothetical discount rate.
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C) What is the range of cost of capital for which should take the project?
Homework Answers
ANSWER:
| NPV | ||||
| Year | Cashflows | PVF @ 10% | Present Values | |
| 0 | -150 | 1 | -150 | |
| 1 | 1000 | 0.909091 | 909.0909 | |
| 2 | -1000 | 0.826446 | -826.446 | |
| 3 | 100 | 0.751315 | 75.13148 | |
| NPV | 7.776 | |||
| The project shall be taken. | ||||
| NPV at 9% | ||||
| Year | Cashflows | PVF @ 9% | Present Values | |
| 0 | -150 | 1 | -150 | |
| 1 | 1000 | 0.917431 | 917.4312 | |
| 2 | -1000 | 0.84168 | -841.68 | |
| 3 | 100 | 0.772183 | 77.21835 | |
| NPV | 2.97 | |||
| NPV at 8% | ||||
| Year | Cashflows | PVF @ 8% | Present Values | |
| 0 | -150 | 1 | -150 | |
| 1 | 1000 | 0.925926 | 925.9259 | |
| 2 | -1000 | 0.857339 | -857.339 | |
| 3 | 100 | 0.793832 | 79.38322 | |
| NPV | -2.03 | |||
| Hence, | ||||
| IRR ranges: | ||||
| IRR (1): | 8% | |||
| IRR (2): | 9% | |||
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