Congener Beverage Corporation is considering an investment in a project that has an internal rate of return of 20%. The only cash outflow for this project is the initial investment. The project is estimated to have an 8 year life and no salvage value. Cash inflows from this project are expected to be $100,000 per year in each of the 8 years. Congener's discount rate is 16%. What is the net present value of this project? (Ignore income taxes.) Use Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor(s) using the tables provided.

Question

Quizplus · Accepted Answer

The internal rate of return is the rate of return at which the investment required equals the present value of the cash inflows.
Investment required = Net annual cash inflow × Present value factor of an annuity for 8 years at 20%
Investment required = $100,000 × 3.837 = $383,700
Net present value = −Investment required + (Net annual cash inflow × Present value factor of an annuity for 8 years at 16%)
= −$383,700 + ($100,000 × 4.344) = $50,700

Congener Beverage Corporation Is Considering an Investment in a Project