Question

A project that provides annual cash flows of $2,700 for nine years costs $8,800 today.

Requirement 1:A. At a required return of 9 percent, what is the NPV of the project?
B. At a required return of 28 percent, what is the NPV of the project?
C. At what discount rate would you be indifferent between accepting the project and rejecting it?

Answer 1

A. $8,187.17

B. $597.38

C. 30%

Step-by-step explanation:

Calculate the Net Present Value of the Project at the Required Return of 9%

The following is the calculation of NPV using a financial calculator :

($8,000) CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

9.00 % i/yr

Shift NPV $8.187.1666 or $8,187.17

Calculate the Net Present Value of the Project at the Required Return of 9%

The following is the calculation of NPV using a financial calculator :

($8,000) CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

28.00 % i/yr

Shift NPV $597.3765 or $597.38

You will be indifferent between accepting the project and rejecting it at the internal rate of return. The Internal Rate of Return is the interest rate that makes the Present Vale of Cash Flows to equal the Initial Cost of the Investment.

Use the Data given to find the Internal Rate of Return :

($8,000) CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

$2,700 CFj

Shift IRR 30%