Iron
Works International is considering a project that will produce annual cash
flows of $37,200, $45,900, $56,600, and $22,100 over the next four years,
respectively. What is the internal rate of return if the project has an initial
cost of $113,800?
Multiple
Choice
Explanation
0 = −$113,800 + $37,200/(1 +
IRR) + $45,900/(1 + IRR)2 + $56,600/(1 + IRR)3 +
$22,100/(1 + IRR)4
IRR = .1638, or 16.38%
IRR = .1638, or 16.38%
Blink
of an Eye Company is evaluating a 5-year project that will provide cash flows
of $36,900, $68,190, $62,690, $60,590, and $43,690, respectively. The project
has an initial cost of $166,240 and the required return is 8.6 percent. What is
the project's NPV?
Multiple
Choice
Explanation
NPV = −$166,240 + $36,900/(1 +
.086) + $68,190/(1 + .086)2 + $62,690/(1 + .086)3 +
$60,590/(1 + .086)4 + $43,690/(1 + .086)5
NPV = $46,982.37
NPV = $46,982.37
Maud'Dib
Intergalactic has a new project available on Arrakis. The cost of the project
is $32,500 and it will provide cash flows of $17,000, $21,800, and $19,300 over
each of the next three years, respectively. Any cash earned in Arrakis is
"blocked" and must be reinvested in the country for one year at an
interest of 2.8 percent. The project has a required return of 7.8 percent. What
is the project's NPV?
Multiple
Choice
Explanation
Year
2 cash flow = $17,000(1 + .028) = $17,476.00
Year 3 cash flow = $21,800(1 + .028) = $22,410.40
Year 4 cash flow = $19,300(1 + .028) = $19,840.40
NPV = −$32,500 + $0/(1 + .078) + $17,476.00/(1 + .078)2 + $22,410.40/(1 + .078)3 + $19,840.40/(1 + .078)4
NPV = $15,119.61
Year 3 cash flow = $21,800(1 + .028) = $22,410.40
Year 4 cash flow = $19,300(1 + .028) = $19,840.40
NPV = −$32,500 + $0/(1 + .078) + $17,476.00/(1 + .078)2 + $22,410.40/(1 + .078)3 + $19,840.40/(1 + .078)4
NPV = $15,119.61
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