   Chapter 11, Problem 20P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

NPV A project has annual cash flows of \$7,500 for the next 10 years and then \$10,000 each year for the following 10 years. The IRR of this 20-year project is 10.98%. If the firm’s WACC is 9%, what is the project’s NPV?

Summary Introduction

To calculate: NPV of the given project.

Net Present Value (NPV):

It is a method under capital budgeting which includes the calculation of net present value of the project in which company is investing. The calculation is done by calculating the difference between the value of cash inflow and value of cash outflow after taking into consideration the discounted rate.

Internal Rate of Return (IRR):

It refers to the rate of return that is computed by the company to make a decision of selection of a project for investment. This rate provides the basis for selection of projects with lower cost of capital and rejection of project with higher cost of capital.

Explanation

Given,

Cash inflow from the given project is \$7,500 per year for first 10 years.

Cash inflow from the given project is \$10,000 per year for next 10 years.

IRR of the project is 10.98%.

Life of the project is 20 years.

Cost of capital is 9%.

Calculation for initial investment of the given project on spreadsheet is,

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