Question

The ASAN Ink’s Inc. is evaluating the following investment opportunity which will cost the firm $90,000 if undertaken. In addition, it is projected that the following after-tax returns will be generated from the project.

1 30,000

2 45,000

3 40,000

4 -10,000

What will the NPV be on the proposed project based on a weighted average cost of capital of 12%? Additionally, what will the project’s IRR be? Which one is more reliable in this situation? Why?

Answer 1

Year	Cash Flow	PVIFA at 12%	PV at 12%
0	$ -90,000.00	1.00000	$ -90,000.00
1	$    30,000.00	0.89286	$     26,785.71
2	$    45,000.00	0.79719	$     35,873.72
3	$    40,000.00	0.71178	$     28,471.21
4	$ -10,000.00	0.63552	$      -6,355.18
NPV			$      -5,224.53
IRR is that discount rate for which NPV is 0. It is to be
found out by trial and error by discounting with
different rates to get 0 NPV.
Discounting with 11%:
Year	Cash Flow	PVIFA at 8%	PV at 8%	PVIFA 9%	PV AT 9%
0	$ -90,000.00	1.00000	$ -90,000.00	1	$ -90,000.00
1	$    30,000.00	0.92593	$     27,777.78	0.91743	$    27,522.94
2	$    45,000.00	0.85734	$     38,580.25	0.84168	$    37,875.60
3	$    40,000.00	0.79383	$     31,753.29	0.77218	$    30,887.34
4	$ -10,000.00	0.73503	$      -7,350.30	0.70843	$     -7,084.25
NPV			$ 761.02		$        -798.38
IRR lies between 8% and 9%.
By simple interpolation, IRR = 8%+1%*761.02/(761.02+798.38) =					8.49%

The NPV is more reliable in this situation, as with negative cash flows more than one IRR

may result.