Benson designs has prepared the following estimates for a long term project it i

Question

Benson designs has prepared the following estimates for a long term project it is considering. The initial investment is 20,230 and the project is expected to yield after tax cash inflows of 4000 per year for 8 years . The firm has a cost of capital of 15% 1 determine the NPV for the project 2 determine the IRR for the project 3 would you recommend that the firm accept or reject the project Benson designs has prepared the following estimates for a long term project it is considering. The initial investment is 20,230 and the project is expected to yield after tax cash inflows of 4000 per year for 8 years . The firm has a cost of capital of 15% 1 determine the NPV for the project 2 determine the IRR for the project 3 would you recommend that the firm accept or reject the project 1 determine the NPV for the project 2 determine the IRR for the project 3 would you recommend that the firm accept or reject the project

Explanation / Answer

Answer

1.If the cost of capital of the firm is 15%, the present value of an annuity of one $ for 8 years is 4.487.

Therefore, the present value of cash inflows is $ 4000 x 4.487= $17,948.

Hence the NPV for the project is $ 17948 - $ 20,230 = (2282), i.e negative.

2. The fake payback value is Initial cash outlay/ average cash inflows =$20,230/4000 = 5.0575

If we refer to the A 4 Table, at 8 years, the nearest value to 5.0575 is 5.146 at 11% discount rate. Therefore the IRR of the project lies between 11 and 12%, let us say about 11.2 % approximately.

3. I would recommend that the firm should reject the project since

a. The NPV is negative, and

b. The IRR is lower than the cost of capital of the firm

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

---