Question

Top Spin company is considering investing in a roof-top solar network to generate its own power. Assume that the expected annual cash inflows from new solar network will be $50,000. A $150,000 net initial investment is required and the network has five-year useful life and 18% required rate of return. Assume that the investment will occur immediately after management approves the project. a. 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) b. To determine a rate at which NPV will be zero, compute Internal Rate of Return and analyze the result. (10 marks)

Answer 1

5 Date Cashflow 3 01/04/15 01/04/16 01/04/17 01/04/18 01/04/19 01/04/20 -150000 50000 50000 50000 50000 50000 - 5 Formula of IRR = 20% (Note: Date of Investment is not given in question, so it's assumed as 1/4/2015, Annual cashflows from project arises from next year - onwards (01/04/2016) accordingly as per our assumption. You may take different dates.) - . 8 T =IRR( B77:B821)
Solution to Part (a):

NPV of a project =[ 50000 PVIFA ( 18%, 5) - Initial Investment ]

= [ 156358.55 - 150000 ]

= $6358.55.

Since, the NPV of a project is positive it is expected to create shareholder's value, therefore, the above project should be accepted.

​​​​​​_{Solution to Part (b):  It is worked out and uploaded above.}