Spotify, Inc. is considering a five-year project that has an initial o

Spotify, Inc. is considering a five-year project that has an initial outlay or cost of $22,000. The future cash inflows from its project for years 1, 2, 3, 4 and 5 are $15,000, $15,000, $15,000, $15,000 and -$41,000, respectively.

Compute both IRRs. Given these IRRs, compute the two NPVs. If Spotify’s true cost of borrowing for this project is 10%, would Spotify choose the project?
What will be an ideal response?

ANSWER

Answer: Using a financial calculator or software program like Excel or trial and error (and rounding off to two digits), we can get two IRRs: 24.88% and 9.34%. If using Excel, you can get 24.88% by typing in a percentage near 24.88% (like 20%) and you can get 9.34% by typing in a percentage near 9.34% (like 10%). If we use these two values to compute the Net Present Value, you would get $0 for each IRR used. If the true cost of capital for this project is 10%, then the NPV would be $90.21 and Spotify would accept the project.