Part A: Your answers should be brief and to the point. Show your calculations, do not just give an answer.
Question 1
The free cash flows of an all-equity project are set out below. Year Cash flows
0 -15,000
1 -15,000
2 +1,000
3 +1,500
4 +2,000
5 +2,500
6 +3,300
Thereafter the free cash flows grow indefinitely at 2.5% per annum.
a) If the project has a cost of capital of 10%, what is its net present value? Show your workings.
b) The IRR of this project is 11%. If we tripled all the cash flows in the project but kept the other assumptions the same, what would happen to its IRR? What would happen to the NPV?
