An investment has an installed cost of $529,800. The cash flows over the four-ye

Question

An investment has an installed cost of $529,800. The cash flows over the four-year life of the investment are projected to be $219,850, $236,450, $203,110, and $151,820.

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 $529,800. The cash flows over the four-year life of the investment are projected to be $219,850, $236,450, $203,110, and $151,820.

Explanation / Answer

If the discount rate is zero, the NPV will be calculated as :

NPV at 0 discount rate=Cash inflows-Cash outflows

NPV at 0 discount rate=219850+236450+203110+151820-529800

NPV=281430

If the discount rate is infinite, the NPV will be calculated as :

NPV at infinite discount rate=Present value of cash inflows-Cash outflow

NPV at infinite discount rate=0-529800

NPV=-529800

Future value of cash flows is zero at infinite discount rate, hence the present value of future cash inflows will be zero an NPV will be equal to cash outflow.

NPV is zero when discount rate=IRR

0=219850/1+IRR + 236450/(1+IRR)^2   + 203110/(1+IRR)^3 +151820/(1+IRR)^4-529800

We will use trial and error method to calculate IRR .

Result=20.87%

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