Reading 6: Discounted Cash Flow Applications习题

Reading 6: Discounted Cash Flow Applications

LOS a, (Part 1): Calculate and interpret the net present value (NPV) and the internal rate of return (IRR) of an investment.

1、The financial manager at Genesis Company is looking into the purchase of an apartment complex for $550,000. Net after-tax cash flows are expected to be $65,000 for each of the next five years, then drop to $50,000 for four years. Genesis’ required rate of return is 9 percent on projects of this nature. After nine years, Genesis Company expects to sell the property for after-tax proceeds of $300,000. What is the internal rate of return (IRR) and net present value (NPV) on this project?

A)           6.66%                               -$64,170

B)           7.01%                       -$53,765

C)           8.09%                       -$21,535

D)           13.99%                     $166,177

The correct answer was B)

IRR Keystrokes:

 CF₀ = -$550,000, CF₁ = $65,000, F₁ = 5, CF₂ = $50,000, F₂ = 3; CF₃ = $350,000, F₃  = 1.

 NPV Keystrokes:

CF₀ = -$550,000, CF₁ = $65,000, F₁ = 5, CF₂ = $50,000, F₂ = 3; CF₃ = $350,000, F₃  = 1.

Compute NPV, I = 9.

 Note:  Although the rate of return is positive, the IRR is less than the required rate of 9%.  Hence, the NPV is negative.

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