Chapter 7, Problem 1AE

1.

To determine

Introduction:

Net present value:

For a specific project, by comparing initial investment, the present value of cash flows in a particular time at a particular rate of return is the net present value.

The reason for the increase in the net present value, which is a result of reducing the discount rate from 14% to 10%.

2.

To determine

Introduction:

Internal Rate of Return:

Internal Rate of Return (IRR) is a rate of interest that is helpful to compare investments of the project with one another and makes the net present value of all cash flows equal to zero.

(a) The net present value of the project, (b) the interest rate at which the net present value turns positive from negative by changing the discount rate by one percent, (c) the two whole discount rates where the internal rate of return is between them, and (d) when the discount rate is 14% and salvage value is uncertain, then how large the salvage value can be to result in a positive net present value.