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NPV/IRR. Growth Enterprises believes its latest project, which will cost $80,000 to install, will generate a perpetual growing stream of cash flows. Cash flow at the end of this year will be $5,000, and cash flows in future years are expected to grow indefinitely at an annual rate of 5 percent.

a. If the discount rate for this project is 10 percent, what is the project NPV?

b. What is the project IRR?

How do I do this?

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a. This is a growing perpetuity. The present value of a growing perpetuity is given as
Cash flow at end of the ...

Solution Summary

The solution explains the calculation of NPV and IRR for a project.

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Capital Budgeting

1. Front up cost of plant is $100 million. Profits of $30million at the end of every year. Calculate the NPV if the cost of capital is 8%. Should you take the investment? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged.

2. Upfront costs $5 million. Profits expected $1million for 10 yrs. The company will provide support expected to cost $100,000/year in perpetuity. Assume all profits and expenses occur at end of year.

a. What is the NPV if cost of capital is 6%? Should firm take project? Repeat for discount rates of 2% and 12%.
b. How many IRRs does this investment opportunity have?
c. Can the IRR rule be used to evaluate this investment? Explain

3.Please choose between 2 projects:

Year end Cash Flow ($thousands)
Project 0 1 2 IRR
Playhouse -30 15 20 10.4%
Fort -80 39 52 8.6%

You can undertake only one project. If your cost of capital is 8% use the incremental IRR rule to make the correct decision.

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