Chapter 11, Problem 20P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# NPV A project has annual cash flows of \$5,000 for the next 10 years and then \$9,000 each year for the following 10 years. The IRR of this 20-year project is 8.52%. If the firm’s WACC is 8%, what is the project’s NPV?

Summary Introduction

To calculate: Net present value (NPV) of the given project.

Introduction:

Net Present Value (NPV):

It is a method under capital budgeting which includes the computation of net present value of the project in which a company is investing. The calculation is done by calculating the difference between the value of cash inflow and value of cash outflow after considering 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 regarding the selection of a project for investment. This rate provides the basis for selection of projects with lower cost of capital and rejection of projects with higher cost of capital.

Explanation

Given information:

Cash inflow from the given project is \$5,000 per year for first 10 years.

Cash inflow from the given project is \$9,000 per year for next 10 years.

IRR of the project is 8.52%.

The projectās life is 20 years.

Cost of capital is 8%.

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

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