CH 11 FINANCE HELP! 6. Understanding IRR and NPV Aa Aa The cash flows of another
ID: 2793047 • Letter: C
Question
CH 11 FINANCE HELP!
6. Understanding IRR and NPV Aa Aa The cash flows of another project with a missing initial cost are as follows: 0 2 4 $400 $800 $500 $300 The project has the same risk as the firm's average project. While you don't know the project's initial cost, you have been told the project has an IRR of 13.3703%. Your boss wants to accept the project because the project's IRR exceeds the WACC of 11.4%, but another manager has mentioned that the NPV should be considered. How much value does this project create for the firm? O $23.07 $60.18 $53.89 $29.16 O $35.28Explanation / Answer
At irr,present value of inflows=present value of outflows.
Hence present value of outflows=400/1.133703+800/1.133703^2+500/1.133703^3+300/1.133703^4
=$1500(Approx)
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
=400/1.114+800/1.114^2+500/1.114^3+300/1.114^4
=$1560.18(Approx)
NPV=Present value of inflows-Present value of outflows
=(1560.18-1500)
=$60.18(Approx)