A project that provides annual cash flows of $2,750 for nine years costs $9,000

Question

A project that provides annual cash flows of $2,750 for nine years costs $9,000 today.

Requirement 1: At a required return of 10 percent, what is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) NPV $

Requirement 2: At a required return of 29 percent, what is the NPV of the project? (Do not round intermediate calculations. A negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).) NPV $

Requirement 3: At what discount rate would you be indifferent between accepting the project and rejecting it? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Discount rate %

Explanation / Answer

Requirement 1,

NPV = -9000+2750*PVIFA(10%,9)

NPV = $6837.32

Requirement 2,

NPV = -9000+2750*PVIFA(29%,9)

NPV = -$475.83

Requirement 3,

it means we have to calculate IRR, that is tthe rate at which NPV = 0

NPV = 0 = -9000+2750*PVIFA(IRR,9)

using calculator,

IRR = 27%

Note: PVIFA is present value interest annuity factor

   PVIFA(r,n) = [1-(1+r)^-n]/r

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