Determine the net present value, Microeconomics

A potential investment project has the following stream of annual social (benefits minus costs), where you may assume the project starts with the capital payment of $12,000 on Day 1, with net benefits accruing on each anniversary of that date:

(a)  Define what is meant by the project's Net Present Value and determine this NPV using a 4% annual rate of discount and also using a 10% annual discount rate.

(b) Without calculating them, what can one infer about the value of the Internal Rate of Return (IRR) and the Benefit-Cost Ratio associated with this project? 

(c) Provide a labeled graph that shows NPV (vertical axis) as a function of discount rate (horizontal axis).  Important points to identify on your graph include

(i) NPV (0),

(ii) NPV (0.04),

(iii) NPV (0.10),

(iv) NPV (∞), and

(v) The IRR [there is no need to estimate or solve for the specific value of the IRR, but you should identify it in your graph.] 

(d) If the discount rate rose to 15% per year, how would this change the IRR and the Benefit-Cost Ratio?

Posted Date: 2/19/2013 2:16:02 AM | Location : United States

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