A project that costs $3,300 to install will provide annual cash flows of $950 fo

Question

A project that costs $3,300 to install will provide annual cash flows of $950 for each of the next 6 years. Calculate the NPV if the discount rate is 13%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

NPV            ______________

Is the project worth pursing?     (yes or no)

How high can the discount rate be before you would reject the project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Discount rate      __________%

Explanation / Answer

NPV = PV of future cashflows - initial cost

= 950 / (1.13)^1 + 950 / (1.13)^2 + 950 / (1.13)^3 + 950 / (1.13)^4 + 950 / (1.13)^5 + 950 / (1.13)^6 - 3300

= $497.67

Yes, the project is worth pursuing as the NPV is positive which means that the project generates more return than the required rate of return.

The highest discount rate before we would reject the project means we have to calculate IRR as at IRR, the NPV of the project is zero and if the discount rate becomes higher than that then the NPV will turn negative.

At IRR, the NPV of the project is 0, so the equation for IRR is:

NPV = PV of future cashflows - initial outflows

0 = 950 / (1+r)^1 + 950 / (1+r)^2 + 950 / (1+r)^3 + 950 / (1+r)^4 + 950 / (1+r)^5 + 950 / (1+r)^6 - 3300

By solving for r in an excel spreadsheet or financila calculator, we get IRR = 13.51%

This is hghest rate till which we can accept the project after that the NPV will become negative.

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