Question

You are considering investing in a start up company. The founder asked you for $ 260 comma 000 today and you expect to get??$ 980 comma 000 in 13 years. Given the riskiness of the investment? opportunity, your cost of capital is 24 %. What is the NPV of the investment? opportunity? Should you undertake the investment? opportunity? Calculate the IRR and use it to determine the maximum deviation allowable in the cost of capital estimate to leave the decision unchanged. What is the NPV of the investment? opportunity?

Answer 1

Year	Cash Flow (C)	PV Factor Calculation	PV Factor @ 24 % (F)	PV (= C x F)
0	$ (260,000)	1/(1.24)^0	1	$       (260,000)
1	0	1/(1.24)^1	0.806451613	$                     -
2	0	1/(1.24)^2	0.650364204	$                     -
3	0	1/(1.24)^3	0.524487261	$                     -
4	0	1/(1.24)^4	0.422973598	$                     -
5	0	1/(1.24)^5	0.34110774	$                     -
6	0	1/(1.24)^6	0.275086887	$                     -
7	0	1/(1.24)^7	0.221844264	$                     -
8	0	1/(1.24)^8	0.178906664	$                     -
9	0	1/(1.24)^9	0.144279568	$                     -
10	0	1/(1.24)^10	0.11635449	$                     -
11	0	1/(1.24)^11	0.093834266	$                     -
12	0	1/(1.24)^12	0.075672796	$                     -
13	$   980,000	1/(1.24)^13	0.061026448	$            59,806
IRR	10.75 %		NPV	$       (200,194)

NPV of investment is - $ 200,194 @ discount rate of 24 %.

As NPV is negative, investment should not be undertaken.

IRR = 10.75 %

Excel formula for IRR is: “= IRR (Cell no: Cell no)”

AS IRR is 10.75 %, Project can be accepted at or below discount rate of 10.75 %.

The cost of capital can decrease up to *13.25 % to leave the decision unchanged.

*(24 % -10.75 % = 13.25 %)