NPV and IRR: Equal Annual Net Cash Inflows Winter Fun Company is evaluating a ca
ID: 2517873 • Letter: N
Question
NPV and IRR: Equal Annual Net Cash Inflows
Winter Fun Company is evaluating a capital expenditure proposal that requires an initial investment of $68,168, has predicted cash inflows of $14,000 per year for seven years, and has no salvage value.
a. Using a discounted rate of 14 percent, determine the net present value of the investment proposal.
Use a negative sign with your answer, if appropriate.
$Answer
b. Determine the proposal's internal rate of return. (Refer to Appendix 12B if you use the table approach.)
Round to the nearest percent. (Example: 0.1568 = 16%)
Answer
%
c. What discount rate would produce a net present value of zero?
Answer
%
Explanation / Answer
Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate
=$14000[1-(1.14)^-7]/0.14
=$14000*4.288304839
=$60036.27
1.NPV=Present value of inflows-Present value of outflows
=$60036.27-$68168
=($8131.73)(Approx)(Negative).
2.Let irr be x%
At irr,present value of inflows=present value of outflows.
68168=14000/1.0x+14000/1.0x^2+.............+14000/1.0x^7
68168=14000[1/1.0x+1/1.0x^2+............+1/1.0x^7]
[1/1.0x+1/1.0x^2+............+1/1.0x^7]=(68168/14000)
=4.869(Approx)
Hence x=irr=10%(Approx)(Also looking at present value of annuity factor(10%,7 years)also].
c.At irr;NPV=0
Hence discount rate=10%.
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