0.00 points Problem 9-9 Calculating NPV and IRR [LO1, 5] A project that provides
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Question
0.00 points Problem 9-9 Calculating NPV and IRR [LO1, 5] A project that provides annual cash flows of $16,600 for eight years costs $72,000 today. What is the NPV for the project if the required return is 7 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) At a required return of 7 percent, should the firm accept this project? Accept Reject What is the NPV for the project if the required return is 19 percent? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV At a required return of 19 percent, should the firm accept this project? O Accept Reject At what discount rate would you be indifferent between accepting the project and rejecting it? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Discount rateExplanation / Answer
Case 1
a. NPV = $27,123.56
b. Accept
As NPV in below working is positive, accept the project.
Rate = R = 7%
Year
Cash flows
Discount factor = Df = 1/(1+R)^Year
Present value = Df x Cash flows
0
-$72,000.00
$1.00
-$72,000.00
1
$16,600.00
$0.93
$15,514.02
2
$16,600.00
$0.87
$14,499.08
3
$16,600.00
$0.82
$13,550.54
4
$16,600.00
$0.76
$12,664.06
5
$16,600.00
$0.71
$11,835.57
6
$16,600.00
$0.67
$11,061.28
7
$16,600.00
$0.62
$10,337.65
8
$16,600.00
$0.58
$9,661.35
Total of Present Value = NPV=
$27,123.56
Case 2
a. NPV = -$6,357.53
b. Reject
As NPV in below working is negative, reject the project.
Rate = R = 19%
Year
Cash flows
Discount factor = Df = 1/(1+R)^Year
Present value = Df x Cash flows
0
-$72,000.00
$1.00
-$72,000.00
1
$16,600.00
$0.84
$13,949.58
2
$16,600.00
$0.71
$11,722.34
3
$16,600.00
$0.59
$9,850.70
4
$16,600.00
$0.50
$8,277.90
5
$16,600.00
$0.42
$6,956.22
6
$16,600.00
$0.35
$5,845.56
7
$16,600.00
$0.30
$4,912.24
8
$16,600.00
$0.25
$4,127.93
Total of Present Value = NPV=
-$6,357.53
Case 3:
Discount rate = 16.04%
Using financial calculator BA II Plus - Input details:
#
FV = Future value =
0
PV = Present Value = Investment =
-$72,000.00
N = Total number of coupon periods =
8
PMT = Payment = Cash flow
$16,600
CPT > I/Y = Rate or yield = Indifferent rate =
16.04
Convert Rate in % form = I/Y /100 =
16.04%
Rate = R = 7%
Year
Cash flows
Discount factor = Df = 1/(1+R)^Year
Present value = Df x Cash flows
0
-$72,000.00
$1.00
-$72,000.00
1
$16,600.00
$0.93
$15,514.02
2
$16,600.00
$0.87
$14,499.08
3
$16,600.00
$0.82
$13,550.54
4
$16,600.00
$0.76
$12,664.06
5
$16,600.00
$0.71
$11,835.57
6
$16,600.00
$0.67
$11,061.28
7
$16,600.00
$0.62
$10,337.65
8
$16,600.00
$0.58
$9,661.35
Total of Present Value = NPV=
$27,123.56
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