Dunn & Co. is considering starting a project that requires an investment of $100

Question

Dunn & Co. is considering starting a project that requires an investment of $100,000 now (CF0). The (end of the year) cash flows from the project are given below:

Year   

CF1

CF2

CF3

CF4

Cash flow in $

$50,000

$50,000

$60,000

$60,000

The cost of capital for the project is 10%. Compute the following for the project: (explain or show the steps you follow to obtain the results)

a.   NPV @ 10%

b.   IRR = 39.17%

c.   Payback period Two years

Year   

CF1

CF2

CF3

CF4

Cash flow in $

$50,000

$50,000

$60,000

$60,000

Explanation / Answer

a. Calculation of the Net Present Value NPV = Present Value of Cash inflows- cash outflows 50000/(1.1)+50000/(1.1)^2+60000/(1.1)^3+60000/(1.1)^4-100000 50000*.909+50000*.826+60000*.751+60000*.683-100000 45455+41322+45079+40980-100000 172837-100000 The NPV is $ 72837 b. IRR NPV at 40% 50000/(1.4)+50000/(1.4)^2+60000/(1.4)^3+60000/(1.4)^4-100000 50000*.714+50000*.510+60000*.364+60000*.260-100000 35714+25510+21866+15618-100000 NPV = ($1,291) IRR = Lower Rate+ NPV at lower rate/ NPV at lower rate+ NPV at higher rate( HR-LR) 10+72837/72837+1291 (40-10) 10+.98*30 10+29.17 IRR = 39.17% c Year Cash Flow Cumulative 0 -100000 -100000 1 50000 -50000 2 50000 0 3 60000 60000 4 60000 120000 Payback Period = 2 Years

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.