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 $54,420, and the project is expected to yield after-tax cash inflows of $7,000 per year for 12 years. The firm has a cost of capital of 11%. Determine the netpresent value (NPV) for the project. Determine the internal rate of return (IRR) for the project. Would you recommend that the firm accept or reject the project? The NPV of the project is $ (Round to the nearest cent.) The IRR of the project is %. (Round to two decimal places.) Would you recommend that the firm accept the project? (Select the best answer below.) No Yes

Explanation / Answer

Benson Designs NPV & IRR details Year PV Factor @11% Investment Cash inflows Net Cash flows PV of net Cash flows Year 0                      1          (54,420)            (54,420)    (54,420.00) Year 1              0.901              7,000                7,000         6,306.31 Year 2              0.812              7,000                7,000         5,681.36 Year 3              0.731              7,000                7,000         5,118.34 Year 4              0.659              7,000                7,000         4,611.12 Year 5              0.593              7,000                7,000         4,154.16 Year 6              0.535              7,000                7,000         3,742.49 Year 7              0.482              7,000                7,000         3,371.61 Year 8              0.434              7,000                7,000         3,037.49 Year 9              0.391              7,000                7,000         2,736.47 Year 10              0.352              7,000                7,000         2,465.29 Year 11              0.317              7,000                7,000         2,220.98 Year 12              0.286              7,000                7,000         2,000.89 Total       (8,973.51) So NPV of the project = $ (8,973.51) IRR calculation Year PV Factor @7.4% Investment Cash inflows Net Cash flows PV of net Cash flows Year 0                      1          (54,420)            (54,420)    (54,420.00) Year 1              0.931              7,000                7,000         6,517.69 Year 2              0.867              7,000                7,000         6,068.61 Year 3              0.807              7,000                7,000         5,650.48 Year 4              0.752              7,000                7,000         5,261.15 Year 5              0.700              7,000                7,000         4,898.65 Year 6              0.652              7,000                7,000         4,561.13 Year 7              0.607              7,000                7,000         4,246.86 Year 8              0.565              7,000                7,000         3,954.25 Year 9              0.526              7,000                7,000         3,681.79 Year 10              0.490              7,000                7,000         3,428.11 Year 11              0.456              7,000                7,000         3,191.91 Year 12              0.425              7,000                7,000         2,971.99 Total               12.63 So NPV at requited rate of return 7.4% is close to zero. So IRR =7.4% As the NPV is negative and   IRR is below cost of capital the project is not   recommended for   acceptance.

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