Question

Row Hamilton Inc. is considering investing in new boathouses working with solar energy for energy saving purposes. Assume that the expected annual cash inflows from new boathouses will be $10,000. A $35,000 net initial investment is required and they have five-year useful life and 12% required rate of return. Assume that the investment will occur immediately after management approves the project.

1. For making decision on whether to approve or reject the project, compute the Net Present Value (NPV) of this new investment and analyze whether it will be accepted or rejected and why. (10 marks)

2. To determine a rate at which NPV will be zero, compute Internal Rate of Return and analyze the result. (10 marks)

Answer 1

Calculation is shown below:

A B с D E F G H 1 a +noco a 2 Net present value is calculated as present value of cash inflow less present value of cash outflow 3 Calculate net present value as shown below. Discount Year Present Cash flow factor @ value 12% 5 0 -$35,000 1.0000 -$35,000.00 6 1 $10,000 0.8929 $8,928.57 7 2 $10,000 0.7972 $7,971.94 3 $10,000 0.7118 $7,117.80 9 4 $10,000 0.6355 $6,355.18 10 5 $10,000 0.5674 $5,674.27 11 Net present value $1,047.76 12 Thus, net present value is $1,047.76 and project should be accepted as it has positive NPV 13 14 b. 15 Calculate IRR of project as shown below: 16 Year Cash flow 17 0 -$35,000 18 1 $10,000 19 2 $10,000 20 3 $10,000 21 4 $10,000 22 5 $10,000 23 IRR 13.20% 24 Thus, IRR of project is 13.20%

Working is given below:

B D 1 a 2 Net present value is calculated as present value of cash inflow less present value of cash outflow 3 Calculate net present value as shown below. Cash flow Present value - 35000 10000 10000 10000 10000 10000 Discount factor @ 12% =1/(1.1200) =1(1.121) =1(1.12 2) =1(1.1243) =1/(1.124) =1(1.125) =B5°C =B6"C6 =B7C7 =B8"C8 =B9"C9 =B10*C10 SUM(D5:010) Year 4 50 61 72 8 3 94 103 11 Net present value 12 Thus, net present value is $1,047.76 and project should be accepted as it has positive NPV 13 14 b 15 Calculate IRR of project as shown below. 16 Year 17 0 18 1 19 2 20 3 21 4 22 5 23 IRR 24 Thus, IRR of project is 13.20% Cash flow -35000 10000 10000 10000 10000 10000 IRR(B17:B22.12%)