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Homework answers / question archive / A firm evaluates the new project and it has the following cash flows: Year 0 1 2 3 4 Cash Flows -$18,000 $4,230 $6,990 $7,200 $9,330 a
A firm evaluates the new project and it has the following cash flows:
| Year | 0 | 1 | 2 | 3 | 4 |
| Cash Flows | -$18,000 | $4,230 | $6,990 | $7,200 | $9,330 |
a. Using IRR, should the firm accept this project if the required return is 10%?
b. What is the NPV at a discount rate of zero percent? What is the NPV at a required return of 21%? Should the firm accept this project?
a)
NPV = - Initial Outlay + 
Cash inflow per year/ (1 + IRR)period
To calculate IRR we assume NPV = 0
0 = -$18,000 + $4230 / (1 + IRR)1 + $6990 / (1 + IRR)2 + $7200 / (1 + IRR)3 + $9330 / (1 + IRR)4
Using Texas Instrument BA 2 plus calculator
Press CF, CFo = -18000, Press ENTER
C01 = 4230, Press ENTER
F01 = 1, Press ENTER
C02 = 6990, Press ENTER
F02 = 1, Press ENTER
C03 = 7200, Press ENTER
F03 = 1, Press ENTER
C04 = 9330, Press ENTER
F04 = 1, Press ENTER
Press IRR. Press CPT
IRR = 17.4899% or 17.49%
The firm should accept the project since IRR > required return
b)
If discount rate = zero percent
NPV = - Initial Outlay + Cash inflow per year/ (1 + discount rate)period
NPV = -$18,000 + $4230 / (1 + 0%)1 + $6990 / (1 + 0%)2 + $7200 / (1 + 0%)3 + $9330 / (1 + 0%)4
NPV = 9750
The firm should accept the project
If required return = 21%
NPV = - Initial Outlay + Cash inflow per year/ (1 + required return)period
NPV = -$18,000 + $4230 / (1 + 21%)1 + $6990 / (1 + 21%)2 + $7200 / (1 + 21%)3 + $9330 / (1 + 21%)4
NPV = -$1313.14
The firm shouldn't accept the project
