Question

Growth Enterprises believes its latest project, which will cost $99,000 to install, will generate a perpetual growing stream of cash flows. Cash flow at the end of the first year will be $7,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5%.

If the discount rate for this project is 10%, what is the project NPV?
What is the project IRR?

Answer 1

The NPV of the Growth Enterprises project, assuming cash flows grow indefinitely at an annual rate of 5%, is $41,000. The IRR cannot be calculated precisely without a financial calculator or dedicated software, as it involves finding the discount rate that makes the NPV equal to zero.

Step-by-step explanation:

To calculate the Net Present Value (NPV) of Growth Enterprises' project, we use the formula for the present value of a perpetuity that grows at a constant rate:

NPV = Cash Flow / (Discount Rate - Growth Rate) - Initial Investment

In this case, the formula becomes:
NPV = $7,000 / (0.10 - 0.05) - $99,000
NPV = $7,000 / 0.05 - $99,000
NPV = $140,000 - $99,000
NPV = $41,000

The NPV of $41,000 means the project will add value to the company as it's a positive number. However, the Internal Rate of Return (IRR) is trickier to calculate without a financial calculator or software, as it requires finding the rate that will make the NPV equal to zero. Also, note the provided references do not directly relate to calculating the NPV and IRR for this particular project and should not be considered.