A project has the following cash flows: Year Cash Flow 0 $82,000 1 -44,000 2 -56
ID: 2667393 • Letter: A
Question
A project has the following cash flows:Year Cash Flow
0 $82,000
1 -44,000
2 -56,000
Required:
(a) What is the IRR for this project? (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))
IRR(_____) percent
(b)
(l) What is the NPV of this project, if the required return is 9 percent? (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))
NPV $ (_______)
(ll) Should the firm accept the project? (Yes/No)
(c) What is the NPV of the project if the required return is 0 and 18 percent? (Do not include the dollar signs ($). Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))
NPV at 0 percent $ (________)
NPV at 18 percent $ (________)
Explanation / Answer
a)
The internal rate of return on an investment or project is the "annualized effective compounded return rate" or discount rate that makes the net present value (NPV) of all cash flows (both positive and negative) from a particular investment equal to zero.
In more specific terms, the IRR of an investment is the discount rate at which the net present value of costs (negative cash flows) of the investment equals the net present value of the benefits (positive cash flows) of the investment.
So calculating IRR with all negative values is not possible
b)
Year Cash Flow
0
-82000
1
-82000
1
-44000
0.917431193
-40366.97248
2
-56000
0.841679993
-47134.07962
NPV
-169501.0521
0
-82000
1
-82000
1
-44000
1
-44000
2
-56000
1
-56000
NPV
-182000
0
-82000
1
-82000
1
-44000
0.847457627
-37288.13559
2
-56000
0.71818443
-40218.32807
NPV
-159506.4637
If we assume that inflows is positive we can calculate IRR
0
-82000
1
44000
2
56000
using Excel function
irr(cell reference) then enter
IRR = 13.71%
Year Cash Flow
0
-82000
1
-82000
1
44000
0.917431193
40366.97248
2
56000
0.841679993
47134.07962
5501.0521
0
-82000
1
-82000
1
44000
1
44000
2
56000
1
56000
18000
0
-82000
1
-82000
1
44000
0.847457627
37288.13559
2
56000
0.71818443
40218.32807
-4493.53634
Year Cash Flow
0
-82000
1
-82000
1
-44000
0.917431193
-40366.97248
2
-56000
0.841679993
-47134.07962
NPV
-169501.0521
0
-82000
1
-82000
1
-44000
1
-44000
2
-56000
1
-56000
NPV
-182000
0
-82000
1
-82000
1
-44000
0.847457627
-37288.13559
2
-56000
0.71818443
-40218.32807
NPV
-159506.4637
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