Answer:
NPV $4.20 million(positive)
IRR 19.60%
( greater than the cost of capital of 12%)
Explanation:
The net present value of the project is the present value of future cash flows discounted at the required rate of return of 12% minus the initial investment outlay
Present value of a future cash flow=future cash flow/(1+r)^n
r=required rate of return=12%
n is the year in which the cash flow is expected, it is 1 for year 1 cash flow, 2 for year 2 and so on.
NPV=$3/(1+12%)^1+$3/(1+12%)^2+$3/(1+12%)^3+$3/(1+12%)^4+$3/(1+12%)^5+$3/(1+12%)^6+$3/(1+12%)^7+$3/(1+12%)^8+$3/(1+12%)^9+$3/(1+12%)^10-$12.75
NPV=$4.20 million
The internal rate of return is the discount at which the present value of the future cash flow and the initial outlay are the same using IRR excel function
Years cash flows
0 ($12.75)
1 $3
2 $3
3 $3
4 $3
5 $3
6 $3
7 $3
8 $3
9 $3
10 $3
IRR(B2:B12) 19.60%
