Question

Cornell Company is considering a project with an initial investment of \(596,500 that is expected to produce cash inflows of \)125,000 for nine years. Cornell’s required rate of return is 12%.

14. What is the NPV of the project?

15. What is the IRR of the project?

16. Is this an acceptable project for Cornell?

Short answer

14. The NPV of the company is $69.531.25.

15. The Annuity factor is 4.772, @15% for 9 years. So the IRR of the project is 15%.

16. This project should be accepted by the company.

Step-by-step solution

14. Computing NPV-

	Net Cash Inflow	x	Annuity PV Factor (i = 12%, n = 9)	Present Value
Present value of annuity (a)	$125,000	x	5.32825	$666,031.25
Initial investment (b)				$596,500.00
Net present value (a-b)				$69,531.25

15. Computing annuity factor-

$\begin{array}{c}\text{Annuityfactor}=\frac{\text{Investment}}{\text{Annualcashflow}}\\ =\frac{\$596,500}{\$125,000}\\ =4.772\end{array}$

16. Project analysis-

The NPV of the company is greater than zero and the IRR is greater than required rate of return. Thus the company should accept the project.