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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.

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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.

$2.19