Question

An capital investment project provides a company with expected cash flows of $10,000; $12,000; $14,000; $16,000, and $18,000 in years 1-5, respectively. The investment will require an initial expenditure of $45,000 and the company has a weighted average cost of capital of 8.0%. What is the net present value of the project?

What is the internal rate of return for the project given?

A stock earns a monthly return of 0.85%. What is the equivalent annualized rate of return?

The total return on an investment over a five year period is 85%. What is the equivalent annualized rate of return?

Answer 1

Year	Cashflows	Discountinf Factor@ 8%	PV
0	-45000	1	- 45,000.00
1	10000	0.93	9,259.26
2	12000	0.86	10,288.07
3	14000	0.79	11,113.65
4	16000	0.74	11,760.48
5	18000	0.68	12,250.50
		NPV	9,671.95

At IRR, NPV of cashflows =0

Lets calculate PV of cashflows at 15%. Now we have two rates at which cashflows are calculated

Year	Cashflows	Discountinf Factor@ 15%	PV
0	-45000	1	- 45,000.00
1	10000	0.87	8,695.65
2	12000	0.76	9,073.72
3	14000	0.66	9,205.23
4	16000	0.57	9,148.05
5	18000	0.50	8,949.18
		NPV	71.84

Let R1= 8%, R2= 15%

Formula for IRR = R1+NPV1*(R2-R1)/(NPV1-NPV2)

= 8% + 9671.95*(15-8)/(9671.95-71.84)

=15.06%

IRR = 15.06%

2nd Question

Annualised Rate of Return = 0.85%^12 = 10.69%

Total Return on investement = 85%

Annualised Return = (1.85^1/5) - 1 = (1.85^0.2) - 1= 1.1309 - 1 = 0.1309 or 13.09%