First five years of a business:

Cost of Capital 8.00%

Initial Investment $(40,000)

Year 1 Cash Flows 8,000

Year 2 Cash Flows 9,200

Year 3 Cash Flows 10,000

Year 4 Cash Flows 12,000

Year 5 Cash Flows 14,500

1. Calculate the net present value (NPV), internal rate of return (IRR) and payback period.

2. Assume you can sell the business in year 5 for 10x’s annual cash flow. Calculate the net present value (NPV) and internal rate of return (IRR).

3. Suppose the cost of capital is 12% instead of 8%.....

4. What are the net present value (NPV) and internal rate of return (IRR) for the initial cash flow numbers with the new cost of capital?

5. Now, assume you can sell the business in year 5 for 10x’s annual earnings. What are the net present value (NPV) and internal rate of return (IRR) with the new cost of capital?

Answer rating: 100% (QA)

Year Cash Flow Cumulative Cashflow 0 40000 40000 1 8000 32000 2 9200 22800 3 10000 12800 4 12000 800 5 14500 13700 Cost of Capital 8 NPV NPV 40000 800... View the full answer