Question

NPV and IRR   Benson Designs has prepared the following estimates for a​ long-term project it is considering. The initial investment is

​$24 comma 30024,300​,

and the project is expected to yield​ after-tax cash inflows of

​$3 comma 0003,000

per year for

1313

years. The firm has a cost of capital of

1212​%.

a.  Determine the net present value​ (NPV) for the project.

b.  Determine the internal rate of return​ (IRR) for the project.

c.  Would you recommend that the firm accept or reject the​ project?

a.  The NPV of the project is

​$nothing.

​(Round to the nearest​ cent

Answer 1

Initial Investment = $24,300
Annual Cash Inflows = $3,000
Life of Project = 13 years
Cost of Capital = 12%

Answer a.

Net Present Value = -$24,300 + $3,000 * PVA of $1 (12%, 13)
Net Present Value = -$24,300 + $3,000 * 6.42355
Net Present Value = -$5,029.35

The NPV of the project is -$5,029.35

Answer b.

Let IRR be i%

Net Present Value = -$24,300 + $3,000 * PVA of $1 (i%, 13)
0 = -$24,300 + $3,000 * PVA of $1 (i%, 13)
PVA of $1 (i%, 13) = 8.10000

Using financial calculator or table values, i = 7.56%

The IRR of the project is 7.56%

Answer c.

NPV of the project is negative and IRR of the project is less than cost of capital, therefore the firm should reject this project.