QUESTION 7 From: Principles of Finance with Excel 3rd ed., Benninga and Mofkadi,

Question

QUESTION 7 From: Principles of Finance with Excel 3rd ed., Benninga and Mofkadi, © 2018, 2011, 2006 You are considering a project whose cash flows are given below: Discount Rate: 25.00% a. Calculate the present value of the future cash flows of the project Initial Investment: 1,000.00 #N/A Time (Yrs Cash Flow b. Calculate the project's net present value s (1,000.00) #N/A 100.00 $200.00 $300.00 $400.00 $500.00 $600.00 $700.00 2 c. Calculate the project's internal rate of return ' #N/A 4 d. Should you undertake the project? 7

Explanation / Answer

CASH FLOW FROM THE PROJECT Answer = a) Years Cash Flows PVF of $ 1 @ 25% Present Value 1 $100 0.80000                    80.00 2 $200 0.64000                  128.00 3 $300 0.51200                  153.60 4 $400 0.40960                  163.84 5 $500 0.32768                  163.84 6 $600 0.26214                  157.29 7 $700 0.20972                  146.80 Total Total                  993.37 Answer =1 =Present value = $ 999.37 Answer = B) Years Cash Flows PVF of $ 1 @ 25% Present Value 0 -$1,000 1.00000            -1,000.00 1 $100 0.80000                    80.00 2 $200 0.64000                  128.00 3 $300 0.51200                  153.60 4 $400 0.40960                  163.84 5 $500 0.32768                  163.84 6 $600 0.26214                  157.29 7 $700 0.20972                  146.80 Total                     -6.63 Answer =b =Present value = $ 6.63 CALCULATION OF THE IRR OF THE PROJECT First we calculate randomly present value with @ 24% discounting rate Years Cash Flows PVF @24% Present Value 0 -$1,000 1 -$1,000.00 1 $100 0.8065 $80.65 2 $200 0.6504 $130.07 3 $300 0.5245 $157.35 4 $400 0.4230 $169.19 5 $500 0.3411 $170.55 6 $600 0.2751 $165.05 7 $700 0.2218 $155.29 Net Present Value = $28.15 With PVF of 24% we are getting positive = $28.15 Secondly we calculate randomly present value @ 25 % discounting rate Years Cash Flows PVF @ 12% Present Value 0 -$1,000 1 -$1,000.00 1 $100 0.8000 $80.00 2 $200 0.6400 $128.00 3 $300 0.5120 $153.60 4 $400 0.4096 $163.84 5 $500 0.3277 $163.84 6 $600 0.2621 $157.29 7 $700 0.2097 $146.80 Net Present Value = -$6.63 With PVF of 25 % we are getting negative =                     -6.63 In the given case the pv with 24% is coming to postive means the present value is more then 24 % but with 25 % Present value cash flow become negative so the prese-nt value is between 24% and 25 % So the differecne in both % net present value is = $28.15 - -$6.63 Total is become = $34.78 So , the difference % = $28.15 "/"By $34.78 So , the difference % = 0.81 So, the IRR = 24.81% Answer 1 = IRR = 24.81% Answer = d Project will not accepted becaue the IRR is less than discount factor that is 25%

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