Questions 12 to 15 refer to the following project (all cash flows occur at the e
ID: 2749499 • Letter: Q
Question
Questions 12 to 15 refer to the following project (all cash flows occur at the end of the period). The firm has a WACC = .1.
Year
Cash flow after taxes
0
-100
1
41
2
41
3
41
12. Is this an acceptable project using the NPV rule?
13. Is this an acceptable project using the IRR rule?
14. What annual future cash flow would make the NPV exactly zero (assume as before that the future cash flows are an annuity)?
15.If the project’s positive cash flows were all delayed by one year, by how much would the NPV decrease?
Year
Cash flow after taxes
0
-100
1
41
2
41
3
41
Explanation / Answer
Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of a projected investment or project. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero WACC 10% Year 0 1 2 3 Post tax CF -100 41 41 41 DCF@10% -100 37.27273 33.8843 30.80391 NPV 1.96093163 IRR 11.11% The project is acceptable from NPV and IRR point of view. WACC 10% Year 0 1 2 3 Post tax CF -100 40.212 40.212 40.212 DCF@10% -100 36.55636 33.23306 30.21187 NPV 0.001 At price Cashflow of around 40.212$ the NPV will be close to 0. WACC 10% Year 0 1 2 3 4 Post tax CF -100 0 41 41 41 DCF@10% -100 0 33.8843 30.80391 28.00355 NPV -35.312 If cash flows start from year 2 instead of year 1 NPV will be -35.312$ So NPV will decrease by 37.273 $
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