# Discount Rate, IRR, NPV

Question 1

A company is considering a project that produces the attached cash flows.

Assume that the appropriate discount rate for this project is 8%.

a) Compute the IRR of this project.

b) Compute the NPV of this project.

c) To select a project would you use IRR or NPV? Explain.

d) What is the economic interpretation of IRR and NPV?

Question 2

The AI corporation has a $150 M worth of common stock on which investors require a 17% rate of return. It also has $35 M in bonds that offer a 7% return.

a) Compute the WACC assuming that AI is subject to a 40% tax rate.

b) Re-compute the WACC assuming that the firm has $85 M in debt and $100 M in stock.

c) Explain why the WACC computed in b) may not be the correct answer if the capital structure changes.

Â© BrainMass Inc. brainmass.com October 5, 2022, 2:32 pm ad1c9bdddfhttps://brainmass.com/economics/bonds/discount-rate-irr-npv-37110

#### Solution Preview

Question 1

A company is considering a project that produces the following cash flows

End of Year Cash Flows Discount Factor Discounted Value

0 ($150,000) 1.000 ($150,000)

1 $40,000 0.926 $37,037

2 $40,000 0.857 $34,294

3 $40,000 0.794 $31,753

4 $20,000 0.735 $14,701

5 $20,000 0.681 $13,612

6 $20,000 0.630 $12,603

7 $10,000 0.583 $5,835

8 $10,000 0.540 $5,403

NPV $5,237

Assume that the appropriate discount rate for this project is 8%.

a) Compute the IRR of this project.

9.19%

b) Compute the NPV of this project.

$5,237

c) To select a project would you use IRR or ...

#### Solution Summary

Discount Rate, IRR, and NPV are assessed in this posting.