Homework SourseAn investment has an installed cost of 566382 The cash flows
An investment has an installed cost of $566,382. The cash flows over the four-year life of the investment are projected to be $195,584, $239,318, $187,674, and $155,313. If the discount rate is zero, what is the NPV? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) NPV $ If the discount rate is infinite, what is the NPV? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) NPV $ At what discount rate is the NPV just equal to zero? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Discount rate %
Solution
NPV at Zero Discount Rate At zero discount rate, the NPV shall be equal to thetotal cashflows. In the given question, total cash flow = -566382+195584+239318+187674+155313 $ 211,507.00 Thus NPV will be $2,11,507 NPV at infinite discount rate If the require rate of return is infinite, the present valaue of future cash flows will have no value. Therefore, NPV shall be equal th the cash flow today In the given qustion, today investmentof Rs.$566382 is made Therefore, NPV shall be equal to = -$566382 Discount Rate, where NPV = Zero Intt. Rate at which NPV is zero is IRR. We will assume different discount rates to calculate the discount rate Cash Flow Year PFV @ 15% PV PVF@14% PV Cash Outflow -566382 0 1 $ (566,382.00) 1 $ (566,382.00) Cash Inflow 195584 1 0.86956522 $ 170,073.04 0.877193 $ 171,564.91 Cash Inflow 239318 2 0.75614367 $ 180,958.79 0.769468 $ 184,147.43 Cash Inflow 187674 3 0.65751623 $ 123,398.70 0.674972 $ 126,674.60 Cash Inflow 155313 4 0.57175325 $ 88,800.71 0.59208 $ 91,957.76 NPV $ (3,150.75) $ 7,962.71 NPV @15% $ (3,150.75) NPV @14% $ 7,962.71 By interlocating = 14% + (3150.75)/(7962.71+3150.75) = 14.7% Therefore at 14.7% discount NPV will be zero
