A project that provides annual cash flows of $18,000 for ten years costs $86,000

Question

A project that provides annual cash flows of $18,000 for ten years costs $86,000 today. What is the NPV for the project if the required return is 9 percent? (Round your answer to 2 decimal places. (e.g., 32.16))

At a required return of 9 percent, should the firm accept this project?

What is the NPV for the project if the required return is 21 percent? (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16)) At a required return of 21 percent, should the firm accept this project?

At what discount rate would you be indifferent between accepting the project and rejecting it? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

1)Present value of cash flow = Annual cash flow *PVAF@9%,10

                                           = 18,000 * 6.41766

                                            = $ 115,517.84

NPV =present value- Initial investment

      = 115,517.84 * 86,000

       = $ 29517.84

b)Yes ,As NpV is positive .so project should be accepted.

c)Present value = Annual cash flow *PVAF@21%,10

                        = 18000 * 4.05408

                        = $ 72973.40

NPV = 72973.40 -860000

       = $ - 13026.60

D)At Indifference point ,Present value =Initial investment = 86000

so using IRR formula .We will select two discount rate that gives present value one ablve initial investment and one below it

IRR = LDR + [(Present value at LDR -II)(HDR-LDR)]/[present value at LDR -present value at HDR]

       = 9+ [(115517.84- 86000 )(21-9 )]/[115517.84-72973.40]

       = 9 + [29517.84 * 12 ] /[42544.44]

       = 9+ [ 354214.08/42544.44]

      = 9 + 8.33

     = 17.33%

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