A project is expected to generate cash flows of $14,000 annually for six years plus an additional $27,000 in year 6. The cost of capital is 10%
a.What is the most you can invest in this project at time 0 and still have a positive NPV?
b.What is the most you can invest in this project at time 0 if you want to have a 15% IRR?
Please refer attached file for better clarity of tables and formulas.
a. What is the most you can invest in this project at time 0 and still have a positive NPV?
Let us see cash flows associated with the project
Year End Cash flows PV Factor @10% PV of cash flow
n Ci PVF=1/(1+10%)^n Ci*PVF
1 14000 0.9091 12727.27
2 14000 0.8264 11570.25
The solution describes the steps to calculate maximum amount that can be invested in a project so that given criteria is satisfied.