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larisa [96]
3 years ago
5

Webster, Inc. is considering an eightminusyear project that has an initial afterminustax outlay or afterminustax cost of​ $180,0

00. The future afterminustax cash inflows from its project for years 1 through 8 are the same at​ $35,000. Webster uses the net present value method and has a discount rate of​ 12%. Will Webster accept the​ project?
Business
1 answer:
Basile [38]3 years ago
4 0

Answer:

No

Explanation:

The estimation of the net present value is shown below:

= Present value of all yearly cash inflows after applying discount factor - initial investment  

where,  

The Initial investment is $180,000

All yearly cash flows would be

= Annual cost savings × PVIFA for 8 years at 12%  

= $35,000 × 4.9676

= $173,886

Refer to the PVIFA table

Now set these values to the formula above

So, the value would equal to

= $173,886 - $180,000

= -$6,134

Since the net present value is negative, so the project should not be accepted

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Answer:

No; The IRR is less than the required return.

Explanation:

Calculation  of IRR is given by the formula: Lr x NPVL / NPVL - NPVH x (Hr - Lr)

where

Lr  = Lower rate of discount

Hr = Higher rate of discount

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Assume a low discount rate of 1% and a high rate of 20%

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<u />

<u>NPV at 20%</u>

<u>Particulars        Year 0  Year 1    Year 2   Year 3</u>

Cash flows       152,000  71,800  86,900  (11,200)

DCF 20%                 1           0.83    0.69       0.58

Present values (152,000) 59,594 59,961   (6,496)

NPV = ($38,941)

Substituting values in the IRR formula we have:

1% x [($6,620 / ($6620 - (38,941))] x (20% - 1%) = 2.06%

Therefore we reject the project because it gives an IRR lower than the required rate of return of 15.5%

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