A project that provides annual cash flows of $16,300 for eight years costs $69,0

Question

A project that provides annual cash flows of $16,300 for eight years costs $69,000 today.

What is the NPV for the project if the required return is 7 percent?

At a required return of 7 percent, should the firm accept this project?

What is the NPV for the project if the required return is 19 percent?

At a required return of 19 percent, should the firm accept this project?

At what discount rate would you be indifferent between accepting the project and rejecting it?

A project that provides annual cash flows of $16,300 for eight years costs $69,000 today.

What is the NPV for the project if the required return is 7 percent?

At a required return of 7 percent, should the firm accept this project?

What is the NPV for the project if the required return is 19 percent?

At a required return of 19 percent, should the firm accept this project?

At what discount rate would you be indifferent between accepting the project and rejecting it?

Explanation / Answer

Hi,

Please find the answer as follows:

Part A = 7%

NPV = -69000 + 16300/(1+.07)^1 + 16300/(1+.07)^2 + 16300/(1+.07)^3 + 16300/(1+.07)^4 + 16300/(1+.07)^5 + 16300/(1+.07)^6 + 16300/(1+.07)^7 + 16300/(1+.07)^8 = 28332.17

The project should be accepted as it offers a + NPV.

Part B = 19%

NPV = -69000 + 16300/(1+.19)^1 + 16300/(1+.19)^2 + 16300/(1+.19)^3 + 16300/(1+.19)^4 + 16300/(1+.19)^5 + 16300/(1+.19)^6 + 16300/(1+.19)^7 + 16300/(1+.19)^8 = -4543.84

The project should not be accepted.

Part C: Calculate IRR

You need to calculate IRR to arrive at the discount rate. To calculate IRR, you need to put the value of NPV as 0 and solve for r as follows:

NPV = 0 = -69000 + 16300/(1+r)^1 + 16300/(1+r)^2 + 16300/(1+r)^3 + 16300/(1+r)^4 + 16300/(1+r)^5 + 16300/(1+r)^6 + 16300/(1+r)^7 + 16300/(1+r)^8

Solving for r, we get IRR as 16.81%

Answer is 16.81%

Thanks.

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