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School

Liberty University *

*We aren’t endorsed by this school

Course

530

Subject

Finance

Date

Feb 20, 2024

Type

png

Pages

1

Uploaded by ProfOkapiPerson648

Report
c d If you insulate your office for $15,000, you will save $1,500 a year in heating expenses. These savings will last forever. a. and b. What is the NPV of the investment when the cost of capital is 5%? What if it is 10%? Cost of Capital b a. 5% $ 15,000 b. 10% 0 c. What is the IRR of the investment? Note: Enter your answer as a whole percent. [IRR T 10{%| d. What is the payback period on this investment? |Payback period [ 10| years Explanation: Some values below may be shown as rounded for display purposes, though unrounded numbers should be used for actual calculations. . The present value of the savings is $1,500 + r, since the savings are forever, they look just like a Perpetuity, and we use the Perpetuity formula to set a present value on that investment. r=0.05= PV = $30,000 and NPV = -$15,000 + $30,000 = $15,000 r=0.10 = PV = $15,000 and NPV = -$15,000 + $15,000 = $0 . IRR=0.10, or 10% At this discount rate, NPV = $0 . Payback period = Initial investment + Annual cash flow = $15,000 + $1,500 = 10 years
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