Question

Two alternative start-up FinTech projects were being contemplated for financing by a venture capitalist to determine which one is more viable, based on cost and returns. Table 4.1 below shows a five-year schedule for the two projects:

Table 4.1

Project	Start of Project	End of 1st Year	End of 2nd Year	End of 3rd Year	End of 4th Year	End of 5th Year
BlockChain GoPay	($230,000)	($32,000)	$66,000	$96,000	$106,000	$119,000
DLT CloudPay	($276,000)	$20,000	$65,000	$96,000	$102,000	$118,000

1. If you were the Project Manager on the Venture Capitalist team, using the Net Present Value (NPV) method, which project would you recommend be financed based strictly on the schedule shown above and an interest rate of 7.5%?
2. Use a Microsoft Excel, or any other method to deduce/calculate the Internal Rate of Return (IRR) for both projects. Explain how you would advise the Bank which project to finance using the result from the IRR method?

Answer 1

NPV = Today's value of expected future cash flow - Today's value of invested cash

Calculating present value

Present value =

r = rate of interest = 7.5% or 0.075

The present value of the 1st project is as follows:

1st year = -32,000/(1+0.075)^1 = -$29,767.44

2nd year = 66,000/(1.075)^2 = $57,111.95

3rd year = 96,000/(1.075)^3 = $77,276.21

4th year = 106,000/(1.075)^4 = $79,372.86

5th year = 119,000/(1.075)^5 = $82,890.48

Net present value = Sum of expected future cash flow - Initial investment

Sum of future cash flow = $266,884.06

NPV = $266,884.06 - $230,000 = $36,884.06

Same with 2nd project

1st year = 20,000/(1+0.075)^1 = $18,604.65

2nd year = 65,000/(1.075)^2 = $56,246.62

3rd year = 96,000/(1.075)^3 = $77,276.21

4th year = 102,000/(1.075)^4 = $76,377.65

5th year = 118,000/(1.075)^5 = $82,193.92

Net present value = Sum of expected future cash flow - Initial investment

Sum of future cash flow = $310,699.06

NPV = $310,699.06 - $276,000

= $34,699.06

Since the NPV of the first project is higher, 1st project is recommended

2. The internal rate of return is the interest rate at which the Net Present Value of all cash flows is equal to zero.

So if a project's internal rate of return is higher it means the interest rate would have to be that high for its NPV to be 0. In other words, Higher NPV is better.

I calculated NPV using a spreadsheet and using the formula =IRR( data range) Only data have to be selected

This image shows all the work used to calculate NPV for the first question and that formula for IRR.

IRR for the first project is 11.66% and the second project is 11.26%.

Since IRR for 1st project is higher, the first project is recommended.