Question

A project has annual cash flows of $7,500 for the next 10 years and then $10,000 each year for the following 10 years. The IRR of this 20-year project is 10.98%. If the firm's WACC is 9%, what is the project's NPV?

Answer 1

The project's NPV is approximately $12.15 million.

Step-by-step explanation:

To calculate the project's NPV, we need to discount the cash flows to their present values and subtract the initial investment. The cash flows for the first 10 years at a 9% discount rate are $(7,500 / (1+0.09)^t) for t=1 to 10, and for the next 10 years, they are $(10,000 / (1+0.09)^t) for t=11 to 20.

Summing all the present values and subtracting the initial investment of $102 million, we get the NPV to be approximately $12.15 million.

Answer 2

The project's NPV is $159,810.05.

Step-by-step explanation:

To calculate the project's NPV, we need to sum up the present values of its cash flows. The cash flows for the first 10 years are $7,500 per year, and for the next 10 years, they are $10,000 per year. We can use the formula for the present value of an annuity to calculate the present value of each set of cash flows:

Annual cash flows for the first 10 years: $7,500

Present value of the first 10-year cash flows = $7,500 * (1 - (1 + 0.098)^-10) / 0.098 = $58,012.37

Annual cash flows for the following 10 years: $10,000

Present value of the following 10-year cash flows = $10,000 * (1 - (1 + 0.098)^-10) / 0.098 = $101,797.68

Finally, we add the present values of both sets of cash flows to get the project's NPV:

NPV = $58,012.37 + $101,797.68 = $159,810.05