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    Discount Rate, IRR, NPV

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    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.

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    https://brainmass.com/economics/bonds/discount-rate-irr-npv-37110

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    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.

    $2.49

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