Any help with solving the following problem is welcomed -- web sites,
formulas, etc.

Growth Enterprises believes its latest project, which will cost
$80,000 to install, will generate a perpetual
growing stream of cash flows. Cash flow at the end of this year will
be $5,000 and cash flows in future
years are expected to grow indefinitely at an annual rate of 5
percent.
						
Enter formulas to answer the two questions of this problem.			
			
a. If the discount rate for this project is 10 percent, what is the
project NPV?
			
Present value of cash flows		FORMULA	
Less: Investment		(80,000)	
NPV		($80,000)	
			
b. What is the project IRR?			
			
IRR	FORMULA

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Request for Question Clarification by livioflores-ga on 03 Jul 2003 09:13 PDT

Hi boobe!!

I am not sure but I think that this case is a candidate to apply the
Gordon Model. Please read the following document and tell me if it
helps you to answer the question. If it is the case I will post the
answer.

To calculate the IRR you need to use Excel formula, I can tell you how
to do that if needed, or you can see the Excel´s help for IRR
function.

I will wait for your response.

livioflores-ga

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Request for Question Clarification by livioflores-ga on 03 Jul 2003 09:15 PDT

Yes, I know, I forgot the link to the document, it is a pdf file, and
you need to have installed the Acrobat Reader:
http://www.abramsvaluation.com/pdf/Gordon_Model.pdf

Regards.
livioflores-ga

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Request for Question Clarification by livioflores-ga on 03 Jul 2003 09:44 PDT

One more thing:
In some texts the NVP is taken as the PV, this is the case of this
document where NPV is the Present Value (PV).

Net Present Value:  
NPV = PV - I         where I = Initial Investment

livioflores-ga

Hi boobee,

a. The present value of a growing perpetuity is calculated by the
formula C(1)/(r-g) where C(1) is the cash flow in period one, r is the
rate of return, and g is the growth rate.  Therefore, the Net Present
Value of the project equals -$80,000 + $5,000/(0.1 - 0.05 )= $20,000. 
This might be an attractive project since it has a positive Net
Present Value.

b.  The Internal Rate of Return is the value of r for which the Net
Present Value is zero.  In this case, it can be solved using simple
algebra.  The Internal Rate of Return is 11.25%.  Since the internal
rate of return is higher than the discount rate of 10%, the Net
Present Value of the project is positive.

Sincerely,

Wonko

Thanks again -- you do great work!!!