Question

Growth Enterprises believes its latest project, which will cost $82,000 to install, will generate a perpetual growing stream of cash flows. Cash flow at the end of the first year will be $7,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5%.


a. If the discount rate for this project is 10%, what is the project NPV? (Do not round intermediate calculations.)

b. What is the project IRR? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Answer:

a. The value of NPV for the project is $36,423.15 at 10% discount rate. B. The IRR is 35%.

Explanation:

Defining the year 1 where the company invest the money, the perpetuity starts in the third year, so for the NPV calculation the calculation of the perpetuity has to be brought to present-day after its first calculation: NPV of perpetuity = [(7000/(0,1-0,05))/(1+0,1)^3]. This value has to be summed to the present value of other cash flows: [(7000)/(1+0,1)^2]+[(-82,000)/(1+0,1)^1]