# solution

First five years of a business:

Cost of Capital 8.00%

Initial Investment \$(40,000)

Year 1 Cash Flows 8,000

Year 2 Cash Flows 9,200

Year 3 Cash Flows 10,000

Year 4 Cash Flows 12,000

Year 5 Cash Flows 14,500

1. Calculate the net present value (NPV), internal rate of return
(IRR) and payback period.

2. Assume you can sell the business in year 5 for 10xâ€™s annual cash
flow. Calculate the net present value (NPV) and internal rate of
return (IRR).

3. Suppose the cost of capital is 12% instead of 8%…..

4. What are the net present value (NPV) and internal rate of return
(IRR) for the initial cash flow numbers with the new cost of
capital?

5. Now, assume you can sell the business in year 5 for 10xâ€™s annual
earnings. What are the net present value (NPV) and internal rate of
return (IRR) with the new cost of capital?

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