An investment has an installed cost of $526,800. The cash flows over the four-ye

Question

An investment has an installed cost of $526,800. The cash flows over the four-year life of the investment are projected to be $222,850, $239,450, $206,110, and $154,820.

If the discount rate is zero, what is the NPV? (Do not round intermediate calculations.)

If the discount rate is infinite, what is the NPV? (Negative amount should be indicated by a minus sign.)

At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

NPV = Present value of all the future cash outflows and inflows

        = - CF0 + [CF1 / (1+r) ] + [CF2 / (1+r)2 ] + [CF3 / (1+r)3] + [CF4 / (1+r)4 ]

a ) When r =0

       NPV = Sum of future cash outflows and inflows

               = -526,800 + 222,850 + 239,450 + 206,110 + 154,820

               = $ 296,430

b) When r = Infinite

     In this case all the factors with 1/ (1+r) or its multiples will become Zero.

So NPV = -526,800

c) if NPV =0 then

   [CF1 / (1+r) ] + [CF2 / (1+r)2 ] + [CF3 / (1+r)3] + [CF4 / (1+r)4 ]   = CF0

In this case r is called IRR ( Internal rate of return )

From Calculator or from Trial and Error method

r = IRR = 22.01 %

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