A project has the following cash flows: Year Cash Flow 0 $ 71,000 1 – 50,000 2 –
ID: 2740577 • Letter: A
Question
A project has the following cash flows: Year Cash Flow 0 $ 71,000 1 – 50,000 2 – 29,200 Requirement 1: What is the IRR for this project? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Internal rate of return % Requirement 2: What is the NPV of this project if the required return is 6 percent? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).) Net present value $ Requirement 3: What is the NPV of the project if the required return is 0 percent? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).) Net present value $ Requirement 4: What is the NPV of the project if the required return is 24 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g.,32.16).) Net present value $
Explanation / Answer
(All Amount in $)
Requirement 1: Calculation of IRR
Year
Particulars
Cash Flow
Present value factor @ 10%
Discounted Cash Flow
Present value factor @ 7%
Discounted Cash Flow
0
Cash Flow
71,000
1
71,000
1
71,000
1
Cash Flow
-50,000
0.9091
-45,455
0.9346
-46,730
2
Cash Flow
-29,200
0.8264
-24,130.88
0.8734
-25,503.28
Net Present Value
1,414.12
-1,233.28
IRR = lower rate NPV + Lower rate NPV/(Higher rate NPV-Lower rate NPV) *(Difference in rates)
IRR = 7% + [-1,233.28/(1,414.12+1,233.28)] * (7-10)
IRR = 7% + (-1,233.28/2647.40)*(-3)
IRR = 7% + 1.40 = 8.40%
Requirement 2: NPV if required rate is 6%
Year
Particulars
Cash Flow
Present value factor @ 6%
Discounted Cash Flow
0
Cash Flow
71,000
1
71,000
1
Cash Flow
-50,000
0.9434
-47,170
2
Cash Flow
-29,200
0.89
-24,208
Net Present Value
-378
Requirement 3: NPV if required rate is 6%
Year
Particulars
Cash Flow
Present value factor @ 6%
Discounted Cash Flow
0
Cash Flow
71,000
1
71,000
1
Cash Flow
-50,000
1
-50,000
2
Cash Flow
-29,200
1
-29,200
Net Present Value
-8,200
Requirement 4: NPV if required rate is 6%
Year
Particulars
Cash Flow
Present value factor @ 24%
Discounted Cash Flow
0
Cash Flow
71,000
1
71,000
1
Cash Flow
-50,000
0.8065
-40,325
2
Cash Flow
-29,200
0.6504
-18,991.68
Net Present Value
11,683.32
Year
Particulars
Cash Flow
Present value factor @ 10%
Discounted Cash Flow
Present value factor @ 7%
Discounted Cash Flow
0
Cash Flow
71,000
1
71,000
1
71,000
1
Cash Flow
-50,000
0.9091
-45,455
0.9346
-46,730
2
Cash Flow
-29,200
0.8264
-24,130.88
0.8734
-25,503.28
Net Present Value
1,414.12
-1,233.28
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