A project that provides annual cash flows of $11,200 for 10 years costs $68,819 today. ...

Question

Question

A project that provides annual cash flows of $11,200 for 10 years costs $68,819 today.

a. If the required return is 4 percent, what is the NPV for this project?

b. Determine the IRR for this project.

Answer 1

Answer #1

a.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$11200[1-(1.04)^-10]/0.04

=$11200*8.110895779

=$90842.03

NPV=Present value of inflows-Present value of outflows

=$90842.03-$68819

=$22023.03(Approx).

b.Let irr be x%
At irr,present value of inflows=present value of outflows.

68819=11200/1.0x+11200/1.0x^2+.................+11200/1.0x^10

Hence x=irr=10%(Approx).

Answer 2

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