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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?
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