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    NPV, IRR and Payback

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    If you insulate your office for $10,000, you will save $1,000 a year in heating expenses. These savings will last forever.

    a. What is the NPV of the investment when the cost of capital is 8%? 10%?
    b. What is the IRR of the investment?
    c. What is the payback period on this investment?

    Show your work.

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    Solution Preview

    a. What is the NPV of the investment when the cost of capital is 8%? 10%?

    NPV = PV of inflows - initial investment
    The inflows are a perpetuity and so the present value is given ...

    Solution Summary

    The solution explains the calculation of NPV, IRR and payback

    $2.19

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