If The WeLoveFinanceAndWantToTakeMore Company invests in the

If The WeLoveFinanceAndWantToTakeMore Company invests in the following 4-year project, by what amount is the value of the company expected to change? Assume a cost of capital of 10%.  SHOW ALL WORK on the TI BAII Plus Calculator USING THE Cash Flow (CF) Register FOR FULL CREDIT.  
Estimated end-of-year cash Flows:
Year 0 (today) -$175,000
Year 1 $50,000
Year 2 $40,000
Year 3 $90,000
Year 4 $47,000
b) (2 pts) Should the company accept or reject it, and why?

Solution

We need to use NPV and IRR to decide on wether to accept or reject

NPV=(-175000/(1+0.1)^0)+(50000/(1+0.1)^1)+(40000/(1+0.1)^2)+(90000/(1+0.1)^3)+(47000/(1+0.1)^4) = $3232.26

IRR = R1+(NPV1*(R2-R1))/(NPV1-NPV2)
R1 is lower discount rate
R2 is higher discount rate
NPV1 is net present value at R1
NPV2 is net present value at R2
So, we need to find R1 and R2 at which IRR become zero or negative
NPV = CF0+CFn/(1+i)^n
NPV1=(-175000/(1+0.1)^0)+(50000/(1+0.1)^1)+(40000/(1+0.1)^2)+(90000/(1+0.1)^3)+(47000/(1+0.1)^4) =3232.36
NPV2=(-175000/(1+0.11)^0)+(50000/(1+0.11)^1)+(40000/(1+0.11)^2)+(90000/(1+0.11)^3)+(47000/(1+0.11)^4)=-722.48
IRR = 0.1+(3232.36*(0.11-0.1))/(3232.36+722.48) = 0.10817 =10.81 per cent

Since the IRR is greater than cost of capital of 10 percent and and NPV being positive, the investment can be accepted or rejected