Question

Los Angeles Lumber Company is considering a project with a cost of $50,000 initially, and inflows of $15625 at the end of years 1-5. LALC’s cost of capital is 10 percent. What is the project’s IRR and NPV?

Answer 1

The project's Internal Rate of Return (IRR) is approximately 13.6%, and the Net Present Value (NPV) of the project is approximately $18,134.22.

Step-by-step explanation:

The Internal Rate of Return (IRR) of a project is the discount rate that makes the Net Present Value (NPV) of the project equal to zero. To calculate the IRR, we need to find the discount rate that equates the sum of the present values of the cash inflows to the initial cost of the project. The formula to calculate the IRR is:

IRR = Initial Cost / (Cash Inflows / (1 + Discount Rate)Number of Periods)

In this case, the initial cost is $50,000 and the cash inflows at the end of each year are $15,625. By plugging in these values into the formula, we can calculate the IRR:

IRR = $50,000 / ($15,625 / (1 + 0.10)5)

Solving this equation, we find that the IRR of the project is approximately 13.6%.

To calculate the NPV of the project, we need to discount the cash inflows at the cost of capital rate and subtract the initial cost. The formula to calculate the NPV is:

NPV = -Initial Cost + (Cash Inflow1 / (1 + Discount Rate)Period 1) + (Cash Inflow2 / (1 + Discount Rate)Period 2) + ... + (Cash Inflown / (1 + Discount Rate)Period n)

Using the given values, we can calculate the NPV:

NPV = -$50,000 + ($15,625 / (1 + 0.10)1) + ($15,625 / (1 + 0.10)2) + ($15,625 / (1 + 0.10)3) + ($15,625 / (1 + 0.10)4) + ($15,625 / (1 + 0.10)5)

Calculating this equation, we find that the NPV of the project is approximately $18,134.22.