A firm must spend $10 million today on a project that is expected to b

A firm must spend $10 million today on a project that is expected to bring in annual revenues of $1.5 million for the next 10 years (beginning at the end of year 1).

a. If the firm’s cost of capital is 5%, what is the NPV of this project?
b. If the firm’s cost of capital is 10%, what is the NPV of this project?
c. What is the internal rate of return?

ANSWER

a. Present value of the revenues = $11.58 million, so NPV = $1.58 million.
b. Present value of the revenues = $9.22 million, so NPV = -$0.78 million.
c. 8.15%