# Net present value profile, Loan repayment

21. Software Systems is considering an investment of $20,000, which produces the following inflows:

Year Cash Flow

1 $11,000

2 $ 9,000

3 $ 5,800

You are going to use the net present value profile to approximate the value for the internal rate of return. Please follow these steps:

a. Determine the net present value of the project based on a zero discount rate.

b. Determine the net present value of the project based on a 10 percent discount rate.

c. Determine the net present value of the project based on a 20 percent discount rate (it will be negative).

d. Draw a net present value profile for the investment. (Use a scale up to $6,000 on the vertical axis, with $2,000 increments. Use a scale up to 20 percent on the horizontal axis, with 5 percent increments.)Observe the discount rate at which the net present value is zero. This is an approximation of the internal rate of return on the project.

e. Actually compute the internal rate of return based on the interpolation procedure presented in this chapter. Compare your answers in parts d and e.

36. If your uncle borrows $60,000 from the bank at 10% interest over the 7 year life of the loan, what equal annual payments must be made to discharge the loan, plus pay the bank its required rate of interest ? How much of his first payment will be applied to interest? To principal? How much of his second payment will be applied to each?

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#### Solution Summary

The solutions answers 2 questions: One of calculation of NPV, IRR, drawing the NPV profile; the other on loan repayments