Calculation Of NPV, IRR And Discount Rate For A New Project

Question

You are considering making an investment in a project.  The initial cost (I₀) equals $1,200.  In return for this initial outlay, you will own the rights to three future cash flows: CF₁ = $300, CF₂ = $400, and CF₃ = $500.  First, if the appropriate discount rate for this investment is 12%, what is the NPV for this project?  Second, what discount rate would create a situation such that NPV = 0, i.e. what discount rate would make NPV = 0?  Make sure that you show your explanation for part two of this question with an NPV calculation – do not just provide a rate.  Third, what is the IRR for this project?

Summary

The question belongs to Finance and it is about calculation of NPV if the project’s discount rate is 12%, the discount rate if NPV = 0 and the IRR for the project need to be calculated. These have been calculated in detail in the solution.

Total Word Count 234