Chapter 11 Investment Decision Criteria Question 1: A project would require an i

Question

Chapter 11 Investment Decision Criteria Question 1: A project would require an initial cash outlay of $5 million and would generate annual net cash inflows of $1 million per year for eight years. What is the project's net present value (NPV) if the discounted rate is 9%? Question 2: What is the internal rates of returm (IRR) for the project that has an initial outlay of $10,000 and a single cash inflow of $17,182 in 8 years? Question 3: What is the internal rates of return (IRR) for the project that has an initial outlay of $10,000 and a cash of year 3? inflow of $2,000 at the end of year 1, a cash inflow of $5,000 at the end of year 2, a cash inflow of $8,000 at the end

Explanation / Answer

Answer to Question 1:

Initial Cash Outflow = $5,000,000
Annual Cash Inflows = $1,000,000
Life of Project = 8 years

NPV = -$5,000,000 + $1,000,000 * PVIFA(9%, 8)
NPV = -$5,000,000 + $1,000,000 * (1 - (1/1.09)^8) / 0.09
NPV = -$5,000,000 + $5,534,819
NPV = $534,819

Answer to Question 2:

Initial Cash Outflow = $10,000
Cash Inflow in 8 years = $17,182

Let IRR be i%

NPV = -$10,000 + $17,182 * PVIF(i%, 8)
0 = -$10,000 + $17,182 * PVIF(i%, 8)

Using financial calculator:
N = 8
PV = -10000
PMT = 0
FV = 17182

I = 7%

IRR of the project is 7%

Answer to Question 3:

Initial Cash Outflow = $10,000
Cash Inflow in year 1 = $2,000
Cash Inflow in year 2 = $5,000
Cash Inflow in year 3 = $8,000

Let IRR be i%

NPV = -$10,000 + $2,000 * PVIF(i%, 1) + $5,000 * PVIF(i%, 2) + $8,000 * PVIF(i%, 3)
0 = -$10,000 + $2,000 * PVIF(i%, 1) + $5,000 * PVIF(i%, 2) + $8,000 * PVIF(i%, 3)

Using financial calculator, i = 18.79%

IRR of the project is 18.79%

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