1. A startup Internet company has generated the following cash balance for the f

ID: 2792754 • Letter: 1

Question

1. A startup Internet company has generated the following cash balance for the first six years of its IS projects: $250,000, -$180,000, $225,000, $340,000, $410,000, and $425,000. Using the NPV function in Excel, calculate the net present value of this project at an 8.5 percent interest rate. What is the IRR of this project? If a bank is willing to give the company a loan at 15 percent to implement these projects, should the company accept the loar (assuming there are no other conditions)? Why or why not?

Explanation / Answer

The NPV at 8.5% interest rate given the 6 years cashflows are:

Years

Cashflow

-250000

-180000

225000

340000

410000

425000

NPV at 8.5%

$571,343.17

NPV at 15%

$376,421.78

IRR

45.448%

Though the NPV of the project is still positive for 15% loan rate but the NPV of project is higher at 8.5% interest rate and thus 8.5% is better off.