Question

Alanya Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? IRR?

WACC:	10.00%
Year	0	1	2	3
Cash flows	-$2,200	$1,000	$1,460	$1,870

Has to be done by hand! Not excel

Answer 1

Net present value (NPV) of Project = Sum of [net cash inflows/ (1+r) ^t] - initial cash outflow

Where,

The cost of capital or WACC =10%

And time period t = 1, 2 and 3

NPV = $1,000/ (1+10%) ^1 + $1,460/ (1+10%) ^2 + $1,870/ (1+10%) ^3 - $2,200

= $909.09 + $1,206.61 + $1,404.96 - $2,200

NPV = $1,320.66

As the NPV of the project is positive therefore project is attractive and can be accepted.

Internal rate of return (IRR) calculation:

Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows from an investment equal zero.

The formula for IRR is:

0 = C0 + C1/ (1+IRR) ^1 + C2/ (1+IRR) ^2+ C3/ (1+IRR) ^3

Where C0, C1, C2, C3 are the cash flows for the respective periods 0, 1, 2, 3

Putting the values in above equation

0 = -$2200 + $1000/ (1+IRR) ^1 + $1460/ (1+IRR) ^2 + $1870/ (1+IRR) ^3

By trial and error method, we can calculate the value of IRR; IRR = 38.09%