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Date Posted: 20:21:00 08/05/02 Mon
Author: Dr. D.
Subject: Re: DaDalt, can you work a problem???
In reply to: N. Laster 's message, "DaDalt, can you work a problem???" on 16:40:14 08/05/02 Mon

The key is that the problem is a perpetuity. So, the PV of the inflows is simply $1,000,000/.14 =7,142,857
So, the NPV is 7,142,857 - $8mm = -$8.57 MM
The PI is $7.142/$8 =0.89

As for the IRR, realize that the IRR is the cost of capital (or discount rate) that results in a zero NPV. SO, set it up as $8mm - ($1mm/x) = 0

Solving for X, we get a cost of capital of 12.5% that results in a zero NPV. So, the NPV is 12.5%

Hope this helps.




>Assuming a discount rate of 14 percent, compute the
>NPV, IRR and PI of a project that costs 8 million and
>generates cash flows of 1 million per year for ten
>years.
>
>Thank You
>Nicolle

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