NPV and IRR Benson Designs has prepared the following estimates for a long-term

Question

NPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $50,860, and the project is expected to yield after-tax cash inflows of $6,000 per year for 13 years. The firm has a cost of capital of 1 196. a. Determine the net present value (NPV) for the project b. Determine the internal rate of return (IRR) for the project c. Would you recommend that the firm accept or reject the project? a. The NPV of the project is $(Round to the

Explanation / Answer

(a) Net Present Value [NPV] of the Project = - $10360.78 [ Negative NPV]

Net Present Value[NPV] = Present Value of cash inflows – Initial Investments

= $6,000[PVIFA 11%, 13 Years] - $50,860

= [ $6,000 x 6.749870 ] - $50,860

= $ 40,499.22 – 50,860

= - $10360.78 [ Negative NPV]

(b) Internal Rate of Return [IRR] for the project = 6.76%

Internal Rate of Return Factor          = Net Initial Investment / Annual Cash Flow

                                                = $50,860 / 6,000

                                                = 8.4766667

From the Present Value Annuity Factor Table, We can find that the discount rate (IRR) corresponding to the factor of 8.4766667 for 13 Years Will be approximately 6.76%

(c) Firm should reject the Project

The Firm should Reject this project proposal Since, The Net Present Value [NPV] is Negative and the Internal Rate of Return [IRR] for the project (6.76%) is less than the company’s required rate of return of 11%. Therefore, The project should not be accepted

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