A project has an NPV of $44,000. Calculate the cost of capital of this project if...
A project has an NPV of $44,000. Calculate the cost of capital of this project if it generates the following cash flows for six years after an initial investment of $190,000: (Round answer to 2 decimal places, e.g. 25.25%.)
| Year 1: | $44,000 | ||
| Year 2: | $44,000 | ||
| Year 3: | $25,000 | ||
| Year 4: | $72,000 | ||
| Year 5: | $56,000 | ||
| Year 6: | $67,000 |
cost of capital= ?%
Homework Answers
NPV=Present value of inflows-Present value of outflows
Present value of inflows=(44000+190,000)=$234000
Let cost of capital be x%
At this rate;Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
234000=44000/1.0x+44000/1.0x^2+25000/1.0x^3+72000/1.0x^4+56000/1.0x^5+67000/1.0x^6
Hence x=cost of capital=7.69%(Approx)
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