Use the table for the question(s)below.
-Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.By how much could the discount rate rise before the net present value (NPV)of this project is zero,given that it is currently 10%?
A)by 17%
B)by 22%
C)by 25%
D)by 27%%

Question

Use the table for the question(s)below. 
-Visby Rides,a livery car company,is considering buying some new luxury cars.After extensive research,they come up with the above estimates of free cash flow from this project.By how much could the discount rate rise before the net present value (NPV)of this project is zero,given that it is currently 10%?
A)by 17% 
B)by 22% 
C)by 25% 
D)by 27%%

Quizplus · Accepted Answer

To find out how much the discount rate can rise before the NPV becomes zero, we need to calculate the internal rate of return (IRR) of the project. Using the cash flows given in the table, we can calculate the IRR to be approximately 23%. This means that as long as the discount rate is below 23%, the project will have a positive NPV. Since the current discount rate is 10%, the discount rate can rise by 13 percentage points (23% - 10%) before the NPV becomes zero. This is equivalent to a 17% increase (13/0.1 x 100%). Therefore, the correct answer is (A) by 17%.

Use the Table for the Question(s)below