Answer:
<u>Requirement 1:</u> $257,000 Positive
<u>Requirement 2:</u> IRR is higher than 10%
Explanation:
<u>Requirement 1:</u>
We can use the following formula, to calculate the net present value of the project:
Net Present Value = Annual Cash Inflows * Annuity Factor - Investment
Here
Annual Cash Inflow is $500,000
r is 10%
n is the life of the project which is 20 years
Annuity factor = (1- (1+r)^-n) / r = (1 - (1 + 10%)^-20) / 10% = 8.514
Investment is $4,000,000
By putting values in the above equation, we have:
Net Present Value = $500,000 * 8.514 - $4,000,000
NPV = $257,000 Positive
<u>Requirement 2:</u>
Internal rate of return gives the required rate at which NPV is zero.
Since NPV is positive at 10%, IRR will be higher than 10%.
Always remember that, increase in the discount rate decreases the NPV and vice versa.
