Question

Click here to read the eBook: Net Present Value (NPV) Click here to read the eBook: Internal Rate of Return (IRR) NPV A project has annual cash flows of $5,000 for the next 10 years and then $8,500 each year for the following 10 years. The IRR of this 20-year project is 10.31%. If the firm's WACC is 9%, what is the project's NPV? Round your answer to the nearest cent. Do not round your intermediate calculations.

Answer 1

The Internal rate of return (IRR) is the discount rate for which the net present value (NPV) is zero.
Using the IRR we can calculate the initial investment of the project.
IRR	0.1031
Initial investment	49637.58
Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is 9% and t is the year
NPV = Initial investment + sum of present values of future cash flows
WACC/r	0.09
Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15	16	17	18	19	20
cash flow	-49637.58	5000	5000	5000	5000	5000	5000	5000	5000	5000	5000	8500	8500	8500	8500	8500	8500	8500	8500	8500	8500
Present value using IRR		4532.68	4109.04	3724.99	3376.84	3061.23	2775.11	2515.74	2280.61	2067.45	1874.22	2888.39	2618.43	2373.70	2151.84	1950.72	1768.40	1603.12	1453.29	1317.46	1194.32
Present value using WACC		4587.156	4208.4	3860.917	3542.126	3249.657	2981.337	2735.171	2509.331	2302.139	2112.054	3294.029	3022.045	2772.518	2543.595	2333.573	2140.893	1964.122	1801.947	1653.162	1516.663
NPV	5493.26
The net present value of the project is $5493.3