Here are the cash flows for a project under consideration: C 0 C 1 C 2 --- $6,87

Question

Here are the cash flows for a project under consideration:

C0                                      C1                               C2

--- $6,870                       + $4,680                         + $18,120

A. Calculate the project's net present value for discount rates of 0, 50%, and 100%. (Leave no cells blank-be certain to enter "0" wherever required. Do not round intermediate calculations. Round your answers to the nearest whole dollar.)

discount rate                    net present value

            0%                        $_____________

           50%                       $_____________

         100%                      $_____________

b. what is the IRR of the project? (Do not round intermediate calculations. Enter your answer as a whole percent.)

IRR _________________%

Explanation / Answer

Net Present Value = Present Value of Cash inflows - Present Value of Cash outflow

If Discount Rate is 0 %.

Net Present Value of Project = (4680 + 18120) - 6870

= 22800 - 6870

= $ 15930

If Discount rate is 50 %.

Present Value of Cash inflows = 4680 * Present Value Factor @ 50 % for first year + 18120 * Present Value Factor @ 50 % for Second year

= 4680 * 0.667 + 18120 * 0.444

= 11166.84

Net Present Value of Project = 11166.84 - 6870 = $ 4296.84 i.e., rounded off to $ 4297.

If Discount rate is 100 %.

Present Value of Cash inflows = 4680 * Present Value Factor @ 100 % for first year + 18120 * Present Value Factor @ 100 % for Second year

= 4680 * 0.5 + 18120 * 0.25

= 6870

Net Present Value of Project = 6870 - 6870 = 0

Conclusion:-

b) IRR of Project:-

Take two rates. One rate at which Present Value of Cash inflow is greater than the Present Value of Cash outflow and vice-versa.

At 50 %

Present Value of Cash inflows = $ 11166.84

Present Value of Cash outflow = $ 6870

At 110 %

Present Value of Cash inflows = 4680 * Present Value Factor @ 110 % for first year + 18120 * Present Value Factor @ 110 % for Second year

= 4680 * 0.476 + 18120 * 0.227

= $ 6340.92

Present Value of Cash outflow = $ 6870

IRR (By Inter-polation) = 50 + (110 - 50) * (11166.84 - 6870) / (11166.84 - 6340.92)

= 50 + 60 * 4296.84 / 4825.92

= 50 + 257810.40 / 4825.92

= 50 + 53.42

= 103.42 % i.e., rounded off to 103 %.

Conclusion:- IRR = 103 % (approx)

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.