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Sir please I want to understand how to solve a question like this
Question
The project hast the following cash flows.
T0 outflow $110,000
T1-4 outflow. $40,000
At the company‘a cost of capital of 10% the NPV of the project is $16,800.Applying sensitivity analysis to the cost of capital,what percentage change in cost of capital would cause the project NPV to fall to zero.
A.70%
B.17%
C.5%
D.41%Answer
70%We need to calculate the IRR, because by definition the IRR is the rate of interest at which the NPV is zero.
To get the IRR you could make two guesses as usual, although because it is an annuity the quickest is to use the fact that the 4 year annuity factor is equal to 110,000 / 40,000 = 2.75.
If you then look along the 4 year row in the annuity tables, then the interest rate that gives a factor nearest to 2.75 is 17%Therefore the % change required is 7/10 = 70%.
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