A project that provides annual cash flows of 3100 for 8 year

A project that provides annual cash flows of $3,100 for 8 years costs $13,400 today. Required:

(a) If the required return is 10 percent, what is the NPV for this project?

(b) Determine the IRR for this project.

Solution

Calculation of NPV

NPV= [Present value of all cash flows] – Initial Investment

=[3100*PVAF@10%,8Years] – 13400

=[3100*5.33]-13400

=$3323

Calculation of IRR

First wa have to calculate NPV at a higher rate Say,20%

NPV=3100*3.83 -13400

=$ -1527

Therefore IRR = R1 + NPV1(R2-R1)

                                NPV1-NPV2

=10%+3323(20%-10%)

               3323+1527

=10%+6.85%=16.85%