A company just paid $10 million for a feasibility study. If the company goes ahead with the project, it must immediately spend another $100 million now, and then spend $20 million in one year. In two years it will receive $80 million, and in three years it will receive $90 million. If the cost of capital for the project is 11 percent, what are the project's NPV and IRR?

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount all cash flows to present value using the cost of capital of 11%. The table below summarizes the cash flows:

| Year | Cash Flow |
|------|-----------|
| 0    | -110      |
| 1    | -20       |
| 2    | 80        |
| 3    | 90        |

Using a financial calculator or spreadsheet, we can find that the NPV is $12.72 million. Therefore, answer choices C and D are the only possible choices.

To calculate the IRR, we need to find the discount rate that makes the NPV equal to zero. We can use a financial calculator or spreadsheet to find that the IRR is 16%. Therefore, the correct answer is D.

A Company Just Paid $10 Million for a Feasibility Study