11. You are evaluating a proposed project for your company. The project is expec
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Question
11. You are evaluating a proposed project for your company. The project is expected to generate the following end-of-year cash flows:
Please solve for below cash flows: 0------- -$3000 1--------- $300 2----------$300 3---------- $600 4---------- $600 5----------- $800 6----------- $800 7------------$800 8----------- $700
You have been told you should evaluate this project with an interest rate of 8.00%.
A) What is the NPV?
B) what is the Internal Rate of Return (IRR)
C) Based on the information above: Your group leader has now told you that the risk of the project was understated before. As a result, she tells you to recalculate the project’s NPV with a 12.5% interest rate. What is the project’s new NPV?
Explanation / Answer
A)
NPV @ 8% = $345.88
We can accept the project. NPV at 8% discounting rate coming to be positive hence, acceptable NPV.
Rate = R = 8.00%
Year
Cash flows
Discount factor = Df = 1/(1+R)^Year
Present value = Df x Cash flows
0
-$3,000.00
1.0000
-$3,000.00
1
$300.00
0.9259
$277.78
2
$300.00
0.8573
$257.20
3
$600.00
0.7938
$476.30
4
$600.00
0.7350
$441.02
5
$800.00
0.6806
$544.47
6
$800.00
0.6302
$504.14
7
$800.00
0.5835
$466.79
8
$700.00
0.5403
$378.19
Total of Present Value = NPV=
$345.88
B)
IRR can derived by using trial and error, at 10.5157% or 10.52% rate we are getting all cash flow near to zero which means it is appropriate rate of return for the project.
IRR = 10.52%
Rate = R = 10.52%
Year
Cash flows
Discount factor = Df = 1/(1+R)^Year
Present value = Df x Cash flows
0
-$3,000.00
1.0000
-$3,000.00
1
$300.00
0.9048
$271.44
2
$300.00
0.8187
$245.61
3
$600.00
0.7408
$444.46
4
$600.00
0.6702
$402.15
5
$800.00
0.6065
$485.16
6
$800.00
0.5487
$438.98
7
$800.00
0.4965
$397.20
8
$700.00
0.4492
$314.46
Total of Present Value = NPV=
-$0.54
C)
New NPV @ 12.50% = -$238.17
Hence, project at negative NPV is not acceptable we can’t accept this project if rate is 12.5%
Rate = R = 12.50%
Year
Cash flows
Discount factor = Df = 1/(1+R)^Year
Present value = Df x Cash flows
0
-$3,000.00
1.0000
-$3,000.00
1
$300.00
0.8889
$266.67
2
$300.00
0.7901
$237.04
3
$600.00
0.7023
$421.40
4
$600.00
0.6243
$374.58
5
$800.00
0.5549
$443.94
6
$800.00
0.4933
$394.62
7
$800.00
0.4385
$350.77
8
$700.00
0.3897
$272.82
Total of Present Value = NPV=
-$238.17
Rate = R = 8.00%
Year
Cash flows
Discount factor = Df = 1/(1+R)^Year
Present value = Df x Cash flows
0
-$3,000.00
1.0000
-$3,000.00
1
$300.00
0.9259
$277.78
2
$300.00
0.8573
$257.20
3
$600.00
0.7938
$476.30
4
$600.00
0.7350
$441.02
5
$800.00
0.6806
$544.47
6
$800.00
0.6302
$504.14
7
$800.00
0.5835
$466.79
8
$700.00
0.5403
$378.19
Total of Present Value = NPV=
$345.88
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