First five years of a business: Cost of Capital 8.00% Initial Investment $(40,000) Year 1 Cash Flows 8,000 Year...

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Finance

First five years of a business:
Cost of Capital 8.00%
Initial Investment $(40,000)
Year 1 Cash Flows 8,000
Year 2 Cash Flows 9,200
Year 3 Cash Flows 10,000
Year 4 Cash Flows 12,000
Year 5 Cash Flows 14,500
Calculate the net present value (NPV), internal rate of return(IRR) and payback period.
Assume you can sell the business in year 5 for 10x’s annual cashflow. Calculate the net present value (NPV) and internal rate ofreturn (IRR).
Suppose the cost of capital is 12% instead of 8%.....
What are the net present value (NPV) and internal rate of return(IRR) for the initial cash flow numbers with the new cost ofcapital?
Now, assume you can sell the business in year 5 for 10x’s annualearnings. What are the net present value (NPV) and internal rate ofreturn (IRR) with the new cost of capital?

Answer & Explanation Solved by verified expert

3.8 Ratings (668 Votes)

Year Cash Flow Cumulative Cashflow 0 40000 40000 1 8000 32000 2 9200 22800 3 10000 12800 4 12000 800 5 14500 13700 Cost of Capital 8 NPV NPV 40000 8000PF81 9200PF82 10000PF83 12000PF84 14500PF85 NPV 40000 800009259 920008573 1000007938 1200007350 1450006806 NPV 40000 74072 788716 7938 8820 95284 NPV 158076 IRR NPV 40000 8000PFIRR1 9200PFIRR2 10000PFIRR3 12000PFIRR4 14500PFIRR5 For IRR NPV 0 0 40000 8000PFIRR1 9200PFIRR2 10000PFIRR3 12000PFIRR4 See Answer

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First five years of a business:Cost of Capital 8.00%Initial Investment $(40,000)Year 1 Cash Flows 8,000Year 2 Cash Flows 9,200Year 3 Cash Flows 10,000Year 4 Cash Flows 12,000Year 5 Cash Flows 14,500Calculate the net present value (NPV), internal rate of return(IRR) and payback period.Assume you can sell the business in year 5 for 10x’s annual cashflow. Calculate the net present value (NPV) and internal rate ofreturn (IRR).Suppose the cost of capital is 12% instead of 8%.....What are the net present value (NPV) and internal rate of return(IRR) for the initial cash flow numbers with the new cost ofcapital?Now, assume you can sell the business in year 5 for 10x’s annualearnings. What are the net present value (NPV) and internal rate ofreturn (IRR) with the new cost of capital?