A startup Internet company has generated the following cash balance for the firs

Question

A startup Internet company has generated the following cash balance for the first six years of its IS projects: -$250,000, -$180,000, $225,000, $340,000, $410,000, and $425,000. Using the NPV function in Excel, calculate the net present value of this project at an 8.5 percent interest rate. What is the IRR of this project? If a bank is willing to give the company a loan at 15 percent to implement these projects, should the company accept the loan (assuming there are no other conditions)? Why or why not?

Explanation / Answer

(A) Years Cash Flows PVAF @ 8.5% Present Value 1 250000 0.9217 230414.75 2 180000 0.8495 152901.95 3 225000 0.7829 176154.32 4 340000 0.7216 245335.26 5 410000 0.6650 272668.62 6 425000 0.6129 260501.66 NPV 1337976.56 (B) (a) (b) (a*b) © (a*c) Years Cash Flows PVAF @ 10% Present Value PVAF @ 12% Present Value 1 250000 0.9091 227272.73 0.8929 223214.29 2 180000 0.8264 148760.33 0.7972 143494.90 3 225000 0.7513 169045.83 0.7118 160150.56 4 340000 0.6830 232224.57 0.6355 216076.15 5 410000 0.6209 254577.74 0.5674 232645.01 6 425000 0.5645 239901.42 0.5066 215318.23 1271782.63 1190899.12 IRR = Lower Rate + (NPV of lower / (NPV of lower -NPV of higher)) * (Higher Rate - Lower Rate ) IRR = .10 + ( 1271782.63 / ( 1271782.63 - 1190899.12 )) * ( .12-.10) IRR = .10 + (1271782.63/80883.51)) * .02 IRR = 0.10 +15.7236 *.02 IRR = 41.45% © Years Cash Flows PVAF @ 15% Present Value 1 250000 0.8696 217391.30 2 180000 0.7561 136105.86 3 225000 0.6969 156803.99 4 340000 0.6423 218385.48 5 410000 0.5920 242716.31 6 425000 0.5456 231885.88 NPV 1203288.82 NPV is positive therefore accept the loan

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