Question

(a) NPV at the end of the project (discount rate 15%)

(b) IRR at the end of the project.   

  

Year (n)	0	1	2	3	4
Capex	-$600,000	-	-	-	-
Income	-	$200,000	$200,000	$200,000	$200,000
Undiscounted cash flow
P/F (15%)
Discounted cash flow
IRR		-	-	-	-

Answer 1

NPV = PV of Cash Inflows - PV of Cash Outflows

Year	CF	PVF @15%	Disc CF
0	$ -6,00,000.00	1.0000	$ -6,00,000.00
1	$ 2,00,000.00	0.8696	$ 1,73,913.04
2	$ 2,00,000.00	0.7561	$ 1,51,228.73
3	$ 2,00,000.00	0.6575	$ 1,31,503.25
4	$ 2,00,000.00	0.5718	$ 1,14,350.65
NPV			$    -29,004.33

IRR is the rate at which PV of Cash Inflows are equal to PV of Cash Outflows.

Year	CF	PVF @12%	Disc CF	PVF @13%	Disc CF
0	$ -6,00,000.00	1.0000	$ -6,00,000.00	1.0000	$ -6,00,000.00
1	$ 2,00,000.00	0.8929	$ 1,78,571.43	0.8850	$ 1,76,991.15
2	$ 2,00,000.00	0.7972	$ 1,59,438.78	0.7831	$ 1,56,629.34
3	$ 2,00,000.00	0.7118	$ 1,42,356.05	0.6931	$ 1,38,610.03
4	$ 2,00,000.00	0.6355	$ 1,27,103.62	0.6133	$ 1,22,663.75
NPV			$        7,469.87		$      -5,105.73

IRR = Rat at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in DIsc Rate ] * 1%

= 12% + [ 7469.87 / 12,575.60 ] * 1%

= 12% + (0.59 * 1%)

= 12% +0.59%

= 12.59%