Corporation A plans to launch a new project and the financial manager is considering whether this...

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Finance

Corporation A plans to launch a new project and the financialmanager is considering whether this is a valuable investment forthe corporation. Consider: The initial cost of this project is$197.92, and it offers cash flows in the next 3 years, with anestimated cash flow of $ 50 in the first year, $100 in the secondyear and $150 in the third year. Questions: 1. What is the InternalRate of Return (IRR) of this project? 2. If we require a discountrate (r) of 10%, what is the Net Present Value (NPV) of thisproject? Should we invest into this project or not? Please explainstep by step your calculations in details.
Please do not use Excell. I need to be answered this exactlystep by step, by using formulas and simple tables if needed. Thankyou!

Answer & Explanation Solved by verified expert

3.9 Ratings (589 Votes)

Project
IRR is the rate at which NPV =0
IRR	0.199990468
Year	0	1	2	3
Cash flow stream	-197.92	50	100	150
Discounting factor	1	1.19999	1.439977	1.727959
Discounted cash flows project	-197.92	41.667	69.44555	86.80762
NPV = Sum of discounted cash flows
NPV Project =	0.000169514
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

IRR=	20.00%
Accept project as IRR is more than discount rate
2


Project
Discount rate	0.1
Year	0	1	2	3
Cash flow stream	-197.92	50	100	150
Discounting factor	1	1.1	1.21	1.331
Discounted cash flows project	-197.92	45.45455	82.64463	112.6972
NPV = Sum of discounted cash flows
NPV Project =	42.88
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Accept project as NPV is positive

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Transcribed Image Text

Corporation A plans to launch a new project and the financialmanager is considering whether this is a valuable investment forthe corporation. Consider: The initial cost of this project is$197.92, and it offers cash flows in the next 3 years, with anestimated cash flow of $ 50 in the first year, $100 in the secondyear and $150 in the third year. Questions: 1. What is the InternalRate of Return (IRR) of this project? 2. If we require a discountrate (r) of 10%, what is the Net Present Value (NPV) of thisproject? Should we invest into this project or not? Please explainstep by step your calculations in details.Please do not use Excell. I need to be answered this exactlystep by step, by using formulas and simple tables if needed. Thankyou!