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1) Growth Enterprises believes its latest project, which will cost $80,000 to install, will generate a perpetual growing stream of cash flows
1) Growth Enterprises believes its latest project, which will cost $80,000 to install, will generate a perpetual growing stream of cash flows. Cash flow at the end of this year will be $5,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5%. What is the project internal rate of return (IRR)?
2) Find the present value of a 3-year bond that pays an annual coupon, has a coupon rate of 6 percent, a yield to maturity of 5 percent, a par value of €1,000 when the yield to maturity is 5 percent.
Expert Solution
1) Computation of the internal rate of return (IRR) of the project:-
Cost = FCF1 / (IRR - Growth rate)
$80,000 = $5,000 / (IRR - 5%)
IRR - 5% = $5,000 / $80,000
IRR = 6.25% + 5%
= 11.25%
2) Computation of the present value:-
Present value = (Coupon payment*((1-1/(1+rate)^n)/rate)) + (FV/(1+rate)^n)
Here,
Coupon payment = €1,000*6% = €60
PV = (€60*((1-1/(1+5%)^3)/5%)) + (€1,000/(1+5%)^3)
= (€60*2.7232) + (€1,000/1.1576)
= €163.39 + €863.84
= €1,027.23
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