Problem 1

Timeline

Years 0 1 2 3 4 5 6 7 8
Cash Flows -$550,000 $89,000 $89,000 $89,000 $95,000 $95,000 $95,000 $105,000 $105,000

Calculation
(a)(b)(c)(d) IRR: 7.61%
Year 3% 4% 8% 9%
(1) NPV @ 3%: $115,924.10 0 1.000 ### ### ###
(2) NPV @ 4%: $87,866.30 1 0.971 0.96 0.93 0.92
(3) NPV @ 8%: -$8,294.29 2 0.943 0.93 0.86 0.84
(4) NPV @ 9%: -$28,890.95 3 0.915 0.89 0.79 0.77
4 0.888 0.86 0.74 0.71
(1) Required Return = 3%; Accept the project since IRR > 3% and NPV > 0 5 0.863 0.82 0.68 ###
(2) Required Return = 4%; Accept the project since IRR > 4% and NPV > 0 6 0.837 0.79 0.63 0.6
(3) Required Return = 8%; Reject the project since IRR < 8% and NPV < 0 7 0.813 0.76 0.58 0.55
(4) Required Return = 9%; Reject the project since IRR < 9% and NPV < 0 8 0.789 0.73 0.54 0.5

NPV Table

Rate of Return NPV

3% $115,924.10
4% $87,866.30
8% -$8,294.29
9% -$28,890.95

NPV
140000

120000 115924.097333075
100000
Net Present Values ($)

87866.2971029654
80000

60000

40000

20000

0 -8294.28947194281
0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.1
-20000 -28890.9468498016

-40000
Required Rates of return (%)