An investment has an installed cost of $525,800. The cash flows over the four-ye

Question

An investment has an installed cost of $525,800. The cash flows over the four-year life of the investment are projected to be $223,850, $240,450, $207,110, and $155,820.

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.)

An investment has an installed cost of $525,800. The cash flows over the four-year life of the investment are projected to be $223,850, $240,450, $207,110, and $155,820.

Explanation / Answer

If discount rate = 0,

NPV = Cash Inflows - Cash Outflows

= $525800 - ($223850 + $240450 + $207110 + $155820)

= $525800 - $827230

= -$301430

If discount rate is infinity, cash flows during the year doesnt have the value.

Hence, NPV = Cash Inflow

= $525800

Where NPV = 0, discount rate = IRR

NPV = 0 implies PV of Cash Outflows = PV of Cash Inflows

Let Discount Rate be x

(223850/ (1+x)) + (240450/ (1+x)2) + (207110/ (1+x)3) + (155820/ (1+x)4) - 525800 = 0

If x= 23%, NPV = 520300 - 525800 = -5500

If x = 22%, NPV = 529426.83 - 525800 = 3626.83

For 1% decrease in discount rate, NPV got increased by $9126.83 (5500+3626.83)

For how much increase in discount rate, NPV gets increased by $5500

Answer is 0.6026 (5500 / 9126.83)

Discount rate at which NPV equals zero is 23 - 0.6026 = 22.3974%

IRR = 22.3974

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