Question

ABC Inc of Portland plans to build a water purification plant overseas. After conducting some study, the following info was gathered:

a. Initial Investment $7,000,000

b. Projected Cash flows: year 1: $850,000, year 2: $975,000, year 3: $1,000,000, year 4: $1,500,000, year 5: $2,000,000, year 6: $3,000,000

c. Cost of capital: 15 percent

Given that info determine the following:

1. NPV and IRR and recommend whether plant should be built or not.

2. the value overseas appreciates by 4 percent per year over the next six years, repeat part 1 and discuss go or no go

Answer 1

Computation of NPV
		KC@15%
Year	Projected Cash inflow	Df	PV
1	8,50,000	0.8696	7,39,160
2	9,75,000	0.7561	7,37,198
3	10,00,000	0.6575	6,57,500
4	15,00,000	0.5718	8,57,700
5	20,00,000	0.4972	9,94,400
6	30,00,000	0.4323	12,96,900
		Total Inflow	52,82,858
		Initial Outflow	70,00,000
		NPV	-17,17,143
Since NPV is negative plant should not build

Computation of IRR
	In IRR
	Outflow =	Pv of Inflow
	7000000 =	850000	975000	1000000	1500000	2000000	3000000
		(1+r)^1	(1+r)^2	(1+r)^3	(1+r)^4	(1+r)^5	(1+r)^6
	Let r = 10%
	7000000 =	850000	975000	1000000	1500000	2000000	3000000
		(1+0.1)^1	(1+0.1)^2	(1+0.1)^3	(1+0.1)^4	(1+0.1)^5	(1+0.1)^6
	7000000 =	850000 +	975000+	1000000+	1500000+	2000000+	30,00,000
		1.1000	1.2100	1.3310	1.4641	1.6105	1.7716
	7000000 =	772727.2727	805785.124	751314.801	1024520.183	1241842.646	1693421.79
	7000000 =	62,89,611.82
	Let r = 7%
	7000000 =	850000	975000	1000000	1500000	2000000	3000000
		(1+0.07)^1	(1+0.07)^2	(1+0.07)^3	(1+0.07)^4	(1+0.07)^5	(1+0.07)^6
	7000000 =	850000	975000	1000000	1500000	2000000	3000000
		1.0700	1.1449	1.2250	1.3108	1.4026	1.5007
	7000000 =	7,94,392.52	8,51,602.76	8,16,297.88	11,44,342.82	14,25,972.36	19,99,026.67
	7000000=	70,31,635.01
	So IRR = 7 % (Approx)

2.Computation of NPV
					KC@15%
Year	Projected Cash inflow(A)	Appreciation @4%	(B)	Projected CF(A*B)	Df	PV
1	8,50,000	(1.04)^1	1.04	8,84,000	0.8696	7,68,726
2	9,75,000	(1.04)^2	1.0816	10,54,560	0.7561	7,97,353
3	10,00,000	(1.04)^3	1.1249	11,24,900	0.6575	7,39,622
4	15,00,000	(1.04)^4	1.1699	17,54,850	0.5718	10,03,423
5	20,00,000	(1.04)^5	1.2167	24,33,400	0.4972	12,09,886
6	30,00,000	(1.04)^6	1.2653	37,95,900	0.4323	16,40,968
					Total Inflow	61,59,978
					Initial Outflow	70,00,000
					NPV	-8,40,022
Since NPV is negative plant should not build

Computation of IRR
	In IRR
	Outflow =	Pv of Inflow
	7000000 =	884000	1054560	1124900	1754850	2433400	3795900
		(1+r)^1	(1+r)^2	(1+r)^3	(1+r)^4	(1+r)^5	(1+r)^6
	Let r = 13%
	7000000 =	884000	1054560	1124900	1754850	2433400	3795900
		(1+0.13)^1	(1+0.13)^2	(1+0.13)^3	(1+0.13)^4	(1+0.13)^5	(1+0.13)^6
	7000000 =	884000	1054560	1124900	1754850	2433400	3795900
		1.1300	1.2769	1.4429	1.6305	1.8424	2.0820
	7000000 =	7,82,300.88	8,25,875.17	7,79,612.13	10,76,282.37	13,20,752.03	18,23,241.10
	7000000 =	66,08,063.67
	Let r = 11.43%
	7000000 =	884000	1054560	1124900	1754850	2433400	3795900
		(1+0.1143)^1	(1+0.1143)^2	(1+0.1143)^3	(1+0.1143)^4	(1+0.1143)^5	(1+0.1143)^6
	7000000 =	884000	1054560	1124900	1754850	2433400	3795900
		1.1143	1.2417	1.3836	1.5417	1.7180	1.9143
	7000000 =	7,93,323.16	8,49,311.56	8,13,031.79	11,38,233.80	14,16,455.23	19,82,905.33
	7000000 =	69,93,260.86
	So IRR = 11.43%