Problem 7. Project K has a cost of $62,125, and its expected net cash inflows ar
ID: 2620058 • Letter: P
Question
Problem 7. Project K has a cost of $62,125, and its expected net cash inflows are $14,000 per year for 8 years a.' The cost of capital is 12%. what is the project's NPV? (3 points) b. What is the project's IRR? (3 points) Problem 8. Calculate the net presen t value of the following project for the discount rate of 15 percent. (6 points) Year 0 Cashflow -$34,000 20,000 9,000 9,000 2 Problem 9 The following project has not one but two IRRs. One is 10 percent. Estimate the other IRR. You must show aNPV profile and indicate at least three NPV points for this project. (7 points) Cashflow -$100 $230 -$132 YearExplanation / Answer
Problem 7 :
Npv = PV of Inflow - PV of Outflows
NPV = [$14000 * PVAF(12%, 8yrs)] - $62125
NPV = [$14000 * 4.9676] - $62125
NPV = $69546.4 -$62125
NPV = $7421.4
NPV is positive hence project can be accepted.
At IRR NPV= 0
Hence
Npv = PV of Inflow - PV of Outflows
0 = $14000 * PVAF (r,8yrs) - $62125
Pv @ 15% = 62822.50
Pv @15.25 = 62309.47
15 + (15.25-15 )62822.50/(62822.50+62309.47)
15 + .25 (1.0041)
15 +.2510
IRR = 15.251%
PVAF = {[1/(1+r)^N] -1 } / r
PVAF = {[1/(1+0.12)8] -1 } / 0.12
PVAF = 4.9676
Problem 8
Npv = PV of Inflow - PV of Outflows
0
NPV is negative i.e (3887.5) hence project should not be accepted.
Year Cashflow PVF @15% PV0
(34000) 1 (34000) 1 20000 0.8695 17390 2 9000 0.7561 6805 3 9000 0.6575 5917.5 TOTAL (3887.5)