Suppose you are offered a project with the following payments Year Cash Flows $8

Question

Suppose you are offered a project with the following payments Year Cash Flows $8,700 -4,700 -3,400 -2,500 -1,000 a. What is the IRR of this offer? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) IRR b. If the appropriate discount rate is 11 percent, should you accept this offer? Accept c. If the appropriate discount rate is 24 percent, should you accept this offer? Accept d-1. What is the NPV of the offer if the appropriate discount rate is 11 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV d-2. What is the NPV of the offer if the appropriate discount rate is 24 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV

Explanation / Answer

a. IRR 16.57% b. Accept c. Reject When, IRR is more than discount rate it means return is more than cost.So, project is accepted when IRR is more than discount rate otherwise rejected. d-1 NPV $                  -780.46 d-2 NPV $                   964.25 Workings: 1) Year Cash flows Discount factor@10% Present Value Discount factor@20% Present Value a b c=1.1^-a b*c d=1.2^-a b*d 0 $         8,700              1.000 $                      8,700                  1.000 $               8,700 1 $       -4,700              0.909 $                    -4,273                  0.833 $             -3,917 2 $       -3,400              0.826 $                    -2,810                  0.694 $             -2,361 3 $       -2,500              0.751 $                    -1,878                  0.579 $             -1,447 4 $       -1,000              0.683 $                        -683                  0.482 $                 -482 NPV $                        -944 $                  493 IRR = 10%+(20%-10%)*(-944/(-944-493)) = 16.57% 2) Year Cash flows Discount factor@11% Present Value Discount factor@24% Present Value a b c=1.1^-a b*c d=1.24^-a b*d 0 $         8,700              1.000 $                8,700.00                  1.000 $         8,700.00 1 $       -4,700              0.901 $              -4,234.23                  0.806 $       -3,790.32 2 $       -3,400              0.812 $              -2,759.52                  0.650 $       -2,211.24 3 $       -2,500              0.731 $              -1,827.98                  0.524 $       -1,311.22 4 $       -1,000              0.659 $                  -658.73                  0.423 $           -422.97 NPV $                  -780.46 $            964.25

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