Question

A

project has annual cash flows of $6,500 for the next 10 years and
then $11,000 each year for the following 10 years. The IRR of this
20-year project is 12.88%If the firm's WACC is 12%, what is the
p

Answer 1

To calculate the present value (PV) of the cash flows for the 20-year project, use the discount rate (WACC) to discount each cash flow back to its present value and sum them up.

Step-by-step explanation:

The present value (PV) of a cash flow represents the value of that cash flow in today's dollars, taking into account the time value of money. To calculate the PV of the cash flows for the first 10 years, we use the formula:

PV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + ... + CF10 / (1 + r)^10

Where CF1, CF2, ..., CF10 are the cash flows for each year, and r is the discount rate (WACC).

Similarly, to calculate the PV of the cash flows for the next 10 years, we use the same formula but with the cash flows from year 11 to 20. Finally, we sum the two PVs together to get the total PV of the project. If the PV is positive, it indicates that the project is worth investing in.

Answer 2

To calculate the present value of the cash flows for the 20-year project, you need to discount each cash flow using the weighted average cost of capital (WACC).

Step-by-step explanation:

To calculate the present value (PV) of the cash flows, we need to discount them at the firm's weighted average cost of capital (WACC). The PV of the first 10 cash flows of $6,500 each can be calculated as:

PV = $6,500 / (1 + 0.12)1 + $6,500 / (1 + 0.12)2 + ... + $6,500 / (1 + 0.12)10

The PV of the next 10 cash flows of $11,000 each can be calculated in the same way:

PV = $11,000 / (1 + 0.12)11 + $11,000 / (1 + 0.12)12 + ... + $11,000 / (1 + 0.12)20

Add the two PVs to get the total PV of the cash flows. If this total PV is higher than the project cost, which is the initial investment, then the project is considered profitable.