NPV A project has annual cash flows of 7500 for the next 10

NPV

A project has annual cash flows of $7,500 for the next 10 years and then $11,000 each year for the following 10 years. The IRR of this 20-year project is 11.71%. If the firm\'s WACC is 10%, what is the project\'s NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.

Solution

STEP 1. Calculation of Initial Cash outlay.

It has given that IRR is 11.71%. At IRR , PV of cash flows will be equals to Initial cash outlay.

So we can establish the following,

[7500*PVAF@11.71,Years 1 to 10] + [11,000*PVAF@11.71%,Year11to 20] – Initial investment = 0

[7500*5.72] + [11,000*1.89]- Initial investment=0

42,900+20,790-Investment=0

So Initial investment =$63,690

STEP 2.Calculation of NPV @10% WACC Rate

NPV=[7500*PVAF@10%,Year 1to10] + [11,000*PVAF@10%,Year11to20] -63,690

=[7500*6.14]+[11,000*2.37]-63690

=46,050+26,070-63,690

=$8,430