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

Question

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?

Help In Homework · Accepted Answer

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

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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

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