Growth Enterprises believes its latest project, which will cost $99,000 to insta
ID: 2772259 • Letter: G
Question
Growth Enterprises believes its latest project, which will cost $99,000 to install, will generate a perpetual growing stream of cash flows. Cash flow at the end of the first year will be $7,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5%.
If the discount rate for this project is 10%, what is the project NPV?
What is the project IRR?
Growth Enterprises believes its latest project, which will cost $99,000 to install, will generate a perpetual growing stream of cash flows. Cash flow at the end of the first year will be $7,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5%.
If the discount rate for this project is 10%, what is the project NPV?
What is the project IRR?
Explanation / Answer
Formula to Calculate Net Present Value:
PV = C1 / d - g
C1 = Cash Flow next Year = 7,000
d = Discount Rate = 10%
g = Growth Rate = 5%
PV = 7,000 / 0.10 - 0.05 = $140,000
NPV = PV of Inflow - Outflow
NPV = 140,000 - 99,000 = $41,000.
Compute irr of the project.
The irr is 21% using excel.
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