Consider an investment that costs $100,000 and has a cash inflow of $25,000 every year for 5 years. The required return is 9%, and payback cutoff is 4 years. - What is the NPV? - What is the IRR? - Should we accept the project?

Consider an investment that costs $100,000 and has a cash inflow of $25,000 every year for 5 years. The required return is 9%, and payback cutoff is 4 years. - What is the NPV? - What is the IRR? - Should we accept the project?

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter9: Capital Budgeting Techniques

Section: Chapter Questions

Problem 11PROB

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Concept explainers

Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.

Question

o Consider an investment that costs $100,000 and has a
cash inflow of $25,000 every year for 5 years. The
required return is 9%, and payback cutoff is 4 years.
- What is the NPV?
- What is the IRR?
- Should we accept the project?

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