Benson designs has prepared the following estimates for a long term project it i

Question

Benson designs has prepared the following estimates for a long term project it is considering. The initial investment is 20,230 and the project is expected to yield after tax cash inflows of 4000 per year for 8 years . The firm has a cost of capital of 15% 1 determine the NPV for the project 2 determine the IRR for the project 3 would you recommend that the firm accept or reject the project Benson designs has prepared the following estimates for a long term project it is considering. The initial investment is 20,230 and the project is expected to yield after tax cash inflows of 4000 per year for 8 years . The firm has a cost of capital of 15% 1 determine the NPV for the project 2 determine the IRR for the project 3 would you recommend that the firm accept or reject the project 1 determine the NPV for the project 2 determine the IRR for the project 3 would you recommend that the firm accept or reject the project

Explanation / Answer

Answer

1.If the cost of capital of the firm is 15%, the present value of an annuity of one $ for 8 years is 4.487.

Therefore, the present value of cash inflows is $ 4000 x 4.487= $17,948.

Hence the NPV for the project is $ 17948 - $ 20,230 = (2282), i.e negative.

2. The fake payback value is Initial cash outlay/ average cash inflows =$20,230/4000 = 5.0575

If we refer to the A 4 Table, at 8 years, the nearest value to 5.0575 is 5.146 at 11% discount rate. Therefore the IRR of the project lies between 11 and 12%, let us say about 11.2 % approximately.

3. I would recommend that the firm should reject the project since

a. The NPV is negative, and

b. The IRR is lower than the cost of capital of the firm

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