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.)

Question

Leland

Business

12 June, 20:58

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.)

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Answers (1)

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Timothy Church · Answer 1

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]