An investment has an installed cost of $575,382. The cash flows over the four-ye

ID: 2757619 • Letter: A

Question

An investment has an installed cost of $575,382. The cash flows over the four-year life of the investment are projected to be $204,584, $248,318, $196,674, and $164,313.

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? (Do not round intermediate calculations. 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 percentage rounded to 2 decimal places (e.g., 32.16).)

Requirement 1:

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

Explanation / Answer

At a zero discount rate (and only at a zero discount rate), the cash flows can be added together across time. So, theNPV of the project at a zero percent required return is:

NPV = $575,382 + 204,584 + 248,318 + 196,674 + 164,313 = $ 238,507

If the required return is infinite, future cash flows have no value. if the future cash flows have no value today, the NPV of the project is the cash flow today, so at an infinite interest rate: NPV = -$575,382

--------------------------------------------------------------------------------------------------------------------------------

Year

Cash flow

PV Factor @ 16.21%

(575,382)

1.0000

(575,382.00)

204,584

0.8605

176,053.34

248,318

0.7405

183,888.01

196,674

0.6373

125,332.81

164,313

0.5484

90,107.79

16.21%

NPV

(0.05)