Homework SourseA project that provides annual cash flows of 3200 for 7 year
A project that provides annual cash flows of $3,200 for 7 years costs $12,600 today. Required: (a) If the required return is 9 percent, what is the NPV for this project? (b) Determine the IRR for this project.
Solution
Requirement (a) – Net Present Value [NPV] of the Project
Net Present Value = Present Value of annual cash inflows – Initial Investment
= $3,200 x [PVIFA 9%, 7 Years] - $12,600
= [$3,200 x 5.0329528] – $12,600
= $16,105.45 – 12,600
= $3,505.45
Requirement (b) – Internal Rate of Return [IRR] of the Project
Internal Rate of Return Factor = Net Initial Investment / Annual Cash Flow
= $12,600 / $3,200
= 3.93750
From the Present Value Annuity Factor Table, We can find that the discount rate (IRR) corresponding to the factor of 3.93750 for 7 Years is approximately 16.87
“”Hence, Internal Rate of Return [IRR] of the Project = 16.87%
