A firm has the opportunity to invest in a project having an initial outlay of $20,000. Net
- Compute the
IRR and theNPV . - Should the firm accept or reject the project?
To compute: The IRR (Internal Rate of Return) and NPV (Net Present Value).
Answer to Problem 1E
IRR (Internal Rate of Return) value is 0.217
NPV (Net Present Value) is 4500
Explanation of Solution
Given:
Firm having the initial outlay =$20,000
Expected Net cash inflows=$5,000
Firm’s cost capital=12 percent
Explain:
It will be calculated internal rate of return (IRR):
In the table of annuity, 2.86 lies between 30.5 and 2.49, therefore r lies between
Now calculate net present value (NPV):
k stands for cost of equity, NCF stands for Net cash Flow and NNIV stands for initial outlay.
To describe: Whether the firm will accept or reject the project.
Answer to Problem 1E
Yes, the firm should accept the project.
Explanation of Solution
Firm having the initial outlay is $20,000
Expected Net cash inflows are $5,000
Firm’s cost capital is 12 percent and also the firm uses the straight-line depreciation method with a zero-salvage value.
Since, Internal Rate of Return (IRR) is greater than the cost of capital and Net Present Value (NPV) is greater than zero.
Hence, the firm should accept the project.
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Chapter 17 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
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