Problem 8-20 NPV and Discount Rates [LO 4] An investment has an installed cost o
ID: 2735806 • Letter: P
Question
Problem 8-20 NPV and Discount Rates [LO 4]
An investment has an installed cost of $562,382. The cash flows over the four-year life of the investment are projected to be $191,584, $235,318, $183,674, and $151,313.
Requirement 1: If the discount rate is zero, what is the NPV? (Do not round intermediate calculations.)
NPV $ _____
Requirement 2: If the discount rate is infinite, what is the NPV? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign.)
NPV $ __________
Requirement 3: At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Discount rate % _________
Explanation / Answer
year Cash Flow Discount Rate 0% Present Value 0 -$562,382 1.00 -$562,382 1 $191,584 1.00 $191,584 2 $235,318 1.00 $235,318 3 $183,674 1.00 $183,674 4 $151,313 1.00 $151,313 NPV $199,507 a) If the discount rate is zero, what is the NPV NPV $199,507 b)If the discount rate is infinite, what is the NPV NPV -$562,382 f the required return is infinite, future cash flows have no value so the future cash flows have no value today, the NPV of the project is simply the cash flow today. At what discount rate is the NPV just equal to zero The interest rate that makes the NPV of a project equal to zero is the IRR Discount Rate 14.03% year Cash Flow 0 -$562,382 1 $191,584 2 $235,318 3 $183,674 4 $151,313 IRR 14.03%