Problem 9-9 Calculating NPV and IRR [LO1, 5] A project that provides annual cash flows of $16,500 for nine years costs $71,000 today.

Problem 9-9 Calculating NPV and IRR [LO1, 5]
A project that provides annual cash flows of $16,500 for nine years costs $71,000 today.
What is the NPV for the project if the required return is 8 percent? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)
 
At a required return of 8 percent, should the firm accept this project?

•     Accept
•     Reject

What is the NPV for the project if the required return is 20 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)








 Explanation
Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

The NPV of a project is the PV of the inflows minus the PV of the outflows. Since the cash inflows are an annuity, the equation for the NPV of this project at required return of 8 percent is:

NPV = –$71,000 + $16,500(PVIFA8%, 9) = $32,073.65

At a required return of 8 percent, the NPV is positive, so we would accept the project.

The equation for the NPV of the project at a required return of 20 percent is:

NPV = –$71,000 + $16,500(PVIFA20%, 9) = –$4,489.05

At a required return of 20 percent, the NPV is negative, so we would reject the project.

We would be indifferent to the project if the required return was equal to the IRR of the project, since at that required return the NPV is zero. The IRR of the project is:

0 = –$71,000 + $16,500(PVIFAIRR, 9)

IRR = 18.00%

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

  

CFo	–$71,000	CFo	–$71,000	CFo	–$71,000
C01	$16,500	C01	$16,500	C01	$16,500
F01	9	F01	9	F01	9
I = 8%		I = 20%		IRR CPT
NPV CPT		NPV CPT		18.00%
$32,073.65		–$4,489.05

Thank You!