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If a project requires an initial investment of $25,000 and then is sold for $42,000 after five...

Question:

If a project requires an initial investment of $25,000 and then is sold for $42,000 after five years, what is its NPV at an interest rate of 6 percent? What is its IRR?

Net present value:

The net present value is the present worth of future discounted cash inflows after deducting the initial cost.

  • {eq}Net \ present \ value = Sum \ of \ discounted \ cash \ inflows - initial \ cost {/eq}

The internal rate of return is the discounting rate at which the Net present value of a project is zero.

The decision rule in using NPV is to accept projects with a positive NPV and that of IRR is to accept projects whose IRR is greater than the cost of capital.

Answer and Explanation:

Given:

Initial investment = $ 25,000

sale proceeds = $ 42,000

n =5 years

r = 6%

  • {eq}NPV = [42000/ (1+0.06)^5] - 25000 {/eq}
  • {eq}NPV =...

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Net Present Value: Evaluating Estimates
Net Present Value: Evaluating Estimates

from Financial Accounting: Help and Review

Chapter 4 / Lesson 1
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