An investment has an installed cost of $527630. The cash flows over the four-yea
ID: 2817545 • Letter: A
Question
An investment has an installed cost of $527630. The cash flows over the four-year life of the investment are projected to be $212,200, $243,800, $203,500, and $167,410, respectively. a. If the discount rate is zero, what is the NPV? (Do not round intermediate calculations.) b. If the discount rate is infinite, what is the NPV? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations.) c. At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g. 32.16.) a. NPV b. NPV C. IRRExplanation / Answer
a.
NPV = $299,280.00
Discount rate = R =
0.0000%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$527,630.00
1.000000
(527,630.0000)
1
$212,200.00
1.000000
212,200.0000
2
$243,800.00
1.000000
243,800.0000
3
$203,500.00
1.000000
203,500.0000
4
$167,410.00
1.000000
167,410.0000
Total of PV = NPV =
$299,280.00
b.
At infinite rate: NPV = - Initial cost = -$527,630.00
Because all future cash flow will turn out to be zero:
Discount rate = R =
10000000000000.0000%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$527,630.00
1.000000
(527,630.0000)
1
$212,200.00
0.000000
0.0000
2
$243,800.00
0.000000
0.0000
3
$203,500.00
0.000000
0.0000
4
$167,410.00
0.000000
0.0000
Total of PV = NPV =
-$527,630.00
c.
IRR is obtained from trial and error method we have to fix such rate for discount that it forces NPV = 0 or sum of all cash flows equal to zero
IRR = 21.76%
Discount rate = R =
21.76%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$527,630.00
1.000000
(527,630.0000)
1
$212,200.00
0.821293
174,278.3563
2
$243,800.00
0.674522
164,448.4759
3
$203,500.00
0.553980
112,734.9667
4
$167,410.00
0.454980
76,168.2012
Total of PV = NPV =
$0.00
Discount rate = R =
0.0000%
Present Values (PV)
Year
Cash flows
Discount factor or PV factors = Df = 1/(1+R)^Year
PV of cash flows = Cash flows x Df
0
-$527,630.00
1.000000
(527,630.0000)
1
$212,200.00
1.000000
212,200.0000
2
$243,800.00
1.000000
243,800.0000
3
$203,500.00
1.000000
203,500.0000
4
$167,410.00
1.000000
167,410.0000
Total of PV = NPV =
$299,280.00
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