#5) Gomi Waste Disposal is evaluating a project that would cost 70,300 dollars t

Question

#5) Gomi Waste Disposal is evaluating a project that would cost 70,300 dollars today. The project is expected to produce annual cash flows of 6,260 dollars forever with the first annual cash flow expected in 1 year. The NPV of the project is -18,904 dollars. What is the cost of capital of the project? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

#6) Fairfax Pizza is evaluating a project that would cost 7,744 dollars today. The project is expected to have the following other cash flows: 2,164 dollars in 1 year, 2,049 dollars in 3 years, and 6,577 dollars in 4 years. The NPV of the project is -81. What is the internal rate of return for the project? Answer as a rate in decimal format so that 12.34% would be entered as .1234 and 0.98% would be entered as .0098.

Explanation / Answer

1

Let r be the cost of capital

So, NPV=-70300+6260/(1+r)+6260/(1+r)^2..........

Hence, NPV=-70300+6260/r

Given, NPV=-18904

So, -70300+6260/r=-18904

=>+70300-18904=6260/r

So, cost of capital, r=12.18%

2

IRR is the rate at which NPV=0

So,

0=-7744+2164/(1+r)+2049/(1+r)^3+6577/(1+r)^4

r=11.17%

Hence, IRR=11.17%

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