Question

Use the following cash flows to calculate the NPV, IRR, PI. The firm's WACC is 6%. Y0 = ($1,500), Y1= $600, Y2 = $700, Y3 = $500. Determine which statement is true.

a) NPV = 108.84; IRR = 9.99%; PI = 1.07

b) NPV = 108.84; IRR = 10.47%; PI = 1.07

c) NPV = 108.84; IRR = 9.99%; PI = 0.0726

d) NPV = 300; IRR = 9.99%; PI = 1.20

Please Explain

Answer 1

a) NPV = 108.84; IRR = 9.99%; PI = 1.07

Working:

	NPV		$ 108.84
	IRR		9.99%
	PI		1.07
working:
a.
	Year	Cash flow	Discount factor@6%	Pesent Value
	1	$         600	0.943	$          566.04
	2	$         700	0.890	$          623.00
	3	$ 500	0.840	$          419.81
	Total			$       1,608.84
	Less:Costs of Project			$       1,500.00
	Net Present Value			$          108.84
b.	PI (Profitability Index)			=	$ 1,608.84	/	$ 1,500.00
				=	1.07
c.	At 10%
	Year	Cash flow	Discount factor@10%	Pesent Value
	1	$         600	0.909	$          545.45
	2	$         700	0.826	$          578.51
	3	$         500	0.751	$          375.66
	Total			$       1,499.62
	Less:Costs of Project			$       1,500.00
	Net Present Value			$             -0.38
	IRR	=	6%+(10%-6%)*(108.84/(108.84+0.38))
		=	9.99%
	IRR is the rate at which NPV is zero.