Question 16 A project that provides annual cash flows of $28,500 for nine years
ID: 2773649 • Letter: Q
Question
Question 16
A project that provides annual cash flows of $28,500 for nine years costs $138,000 today. If the required return is 8 percent, the NPV for the project is $ and you would the project. If the required return is 20 percent, the NPV is $ and you would the project. At a discount rate of percent, you would be indifferent between accepting the project and rejecting it. (Do not include the dollar & percent signs ($ & %). Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Situation one, when Required return is 8%:
Cumulative Present value factor for nine year=6.246
Cash inflow for each year=28,500
Discounted cash flow today=28,500*6.246=178,011
Cash outflow =138,000
Net Present Value = 40,011
Sitution two when required rate of return is 20%
Annual Cash inflow=28,500
Cumulative discount factor=4.031
Discounted inflow=28500*4.031=114,883
Cost =138,000
Net Present Value (-)23,117
IRR is the rate at which we will indifferent in the current situation.
IRR=L+(H-R)*A/(A-B)
=8+(20-8) *40,011/40,011+23117
=15.61%
Discount rate 15.61% at which we are indifferent situation.
L=Lower discount rate
H=Higher discount rate
A=NPV at Lower discount rate
B=NPV at Higher discount rate.