Question

Consider the project with the following expected cash flows:
Year Cash flow
0 -$400,000
1 $100,000
2 $120,000
3 $850,000

•If the discount rate is 0%, what is the project's net present value?
•If the discount rate is 2%, what is the project's net present value?
•If the discount rate is 6%, what is the project's net present value?
•If the discount rate is 11%, what is the project's net present value?
•With a cost of capital of 5%, what is this project's modified internal rate of return?

Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the "x" axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. connect the four points using a free hand 'smooth' curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?

Answer 1

Consider the project with the following expected cash flows:
Year Cash flow
0 -$400,000
1 $100,000
2 $120,000
3 $850,000

•If the discount rate is 0%, what is the project's net present value?
•If the discount rate is 2%, what is the project's net present value?
•If the discount rate is 6%, what is the project's net present value?
•If the discount rate is 11%, what is the project's net present value?
•With a cost of capital of 5%, what is this project's modified internal rate of return?

Now draw (for yourself) a chart where the discount rate is on the horizontal axis (the "x" axis) and the net present value on the vertical axis (the Y axis). Plot the net present value of the project as a function of the discount rate by dots for the four discount rates. connect the four points using a free hand 'smooth' curve. The curve intersects the horizontal line at a particular discount rate. What is this discount rate at which the graph intersects the horizontal axis?