Question

A project has annual cash flows of $7,000 for the next 10 years and then $9,500 each year for the following 10 years. The IRR of this 20-year project is 11.18%. If the firm's WACC is 11%, what is the project's NPV? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

first step is to find cash outflow

As we know, (cash outflow) + cash inflow/ (1+irr)^n =0

i.e. cash outflow = cash inflow / (1+irr)^n

We use financial calculator to calculate cash inflow

Inputs: Pmt = 7,000

Rate = 11.18% i.e. irr

N = 10

Fv = 0

Pv = compute

We get, Pv = 40,915.3139

This the present value of first 10 years cash inflows

The value of next 10 years of cash inflows are

Inputs: pmt = 9,500

Rate = 11.18%

N = 10

Fv = 0

Pv = compute

We get, PV = 55,527.9259

This is present value at the end of 10th year. We need to further discount it by (1+0.1118)^10 to get its present value as of today.

After discounting= 55,527.9259 / (1+0.1118)^10

= 19,241.7583

Therefore total pv of cash inflow = 40,915.3139 + 19,241.7583

= 60,157.0722

As stated above cash outflow = pv of cash inflow

Cash outflow = 60,157.0722

Step two:- Calculation of Npv

Using financial calculator to calculate Npv

Inputs : C0 = -60,157.0722

C1 = 7,000. Frequency=10

   C2 = 9,500. Frequency= 10

I = 11%

Npv = compute

We get, NPV =771.46