NPV and IRR Benson Designs has prepared the following estima

NPV and IRR Benson Designs has prepared the following estimates for a long-term project it is considering. The initial investment is $15,750, and the project is expected to yield after-tax cash inflows of $4,000 per year for 6 years. The firm has a cost of capital of 12%. a. Determine the net present value (NPV) for the project. b. Determine the intenal rate of retun (IRR) for the project. c. Would you recommend that the firm accept or reject the project? a. The NPV of the project is (Round to the nearest cent.)

Solution

a.Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=$4000[1-(1.12)^-6]/0.12

=$4000*4.111407324

=$16445.63

NPV=Present value of inflows-Present value of outflows

=$16445.63-$15750

=$695.63(Approx).

2.Let irr be x%
At irr,present value of inflows=present value of outflows.

15750=4000/1.0x+4000/1.0x^2+...........+4000/1.0x^6

Hence x=irr=13.55%(Approx).

3,Since npv is positive and also irr is greater than the cost of capital;project must be accepted.