What is the NPV of the offer if the appropriate discount rate is 13 percent? (A

Question

What is the NPV of the offer if the appropriate discount rate is 13 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.)

What is the NPV of the offer if the appropriate discount rate is 25 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.)

Explanation / Answer

Answer a.

Let IRR be i%

NPV = $8,800 - $4,800/(1+i) - $3,500/(1+i)^2 - $2,600/(1+i)^3 - $1,400/(1+i)^4
0 = $8,800 - $4,800/(1+i) - $3,500/(1+i)^2 - $2,600/(1+i)^3 - $1,400/(1+i)^4

Using financial calculator, i = 18.61%

IRR of this offer is 18.61%

Answer b.

Discount rate = 13%

NPV = $8,800 - $4,800/1.13 - $3,500/1.13^2 - $2,600/1.13^3 - $1,400/1.13^4
NPV = -$849.38

So, we should reject this offer.

Answer c.

Discount rate = 25%

NPV = $8,800 - $4,800/1.25 - $3,500/1.25^2 - $2,600/1.25^3 - $1,400/1.25^4
NPV = $815.36

So, we should accept this offer.

Answer d-1.

At discount rate of 13%, NPV of this offer is -$849.38

Answer d-2.

At discount rate of 25%, NPV of this offer is $815.36

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.