Here are the cash flows for a project under consideration: C0 C1 C2 $ 7,160 + $

Question

Here are the cash flows for a project under consideration: C0 C1 C2 $ 7,160 + $ 5,020 + $ 18,600 a. Calculate the project’s net present value for discount rates of 0, 50%, and 100%. (Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to the nearest whole dollar.) Discount rate Net present value 0% $ 50% $ 100% $ b. What is the IRR of the project? (Do not round intermediate calculations. Enter your answer as a whole percent.) IRR %

Explanation / Answer

At 0% Discount rate: NPV calculation

At 50% discount rate:

At 100% discount rate:

IRR is the rate at which the net present value is equal to zero. This can be calculated by the given formula:
0 = (investment) + CF1/ (1+IRR)^1+CF2/(1+IRR)^2+CFN/(1+IRR)^N

However in our case at discount rate of 100% the NPV of the project is zero. Hence the IRR of the project is 100%.

Year Cash Flow PV Factor = 1/(1+R)^n Present Value = Cash Flow * PV factor 0 ($7,160) 1 ($7,160.00) 1 $5,020 1 $5,020.00 2 $18,600 1 $18,600.00 Sum of Present Value of the Cash Flows $23,620.00 Less: Amount invested ($7,160.00) Net Present value = Total PV - Intial Investment $16,460.00

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