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In: Finance

An investment has the following cash flows: August 12, 2008            $   -700 February 21, 2009         $  ...

  1. An investment has the following cash flows:

August 12, 2008            $   -700

February 21, 2009         $   +200

October 7, 2010            $   +500

April 25, 2011               $   +400

May 18, 2012                $   +300

July 29, 2013                 $   +600

November 12, 2014      $   +400

August 12, 2015            $   -1800

  1. Calculate the Net Present Value of this investment. Assume the annual discount rate is 12%.
  2. Create a data table and graph illustrating the impact of the discount rate on the Net Present Value of this investment. Include a title and label the axes for the graph.
  3. Use Solver to determine the Internal Rate of Return(s) associated with this investment.

Solutions

Expert Solution

1) Net Present Value or NPV, is the present value of money given the discounting rate, in our case 12% p.a.

Year

Cashflows

Discounting Factors @12%

Discounted Cash Flows

2008

-700

0.893

-625.000

2009

200

0.797

159.439

2010

500

0.712

355.890

2011

400

0.636

254.207

2012

300

0.567

170.228

2013

600

0.507

303.979

2014

400

0.452

180.940

2015

-1800

0.404

-726.990

NPV = Total of Discounted Cash Flows

72.693

The NPV is 72.693, which is positive, hence the project should be undertaken.

2) The impact of Different Discount Rates on NPV, with data table and graph.

Annual Discounting Rate

NPV

4%

₹ 7.75

5%

₹ 24.49

6%

₹ 38.10

7%

₹ 48.97

8%

₹ 57.44

9%

₹ 63.79

10%

₹ 68.30

11%

₹ 71.20

12%

₹ 72.69

13%

₹ 72.97

14%

₹ 72.19

15%

₹ 70.49

16%

₹ 68.01

17%

₹ 64.86

18%

₹ 61.14

It can be seen that NPV increases with the increasing discounting rates and reaches maximum at 13% and then begins to fall.

3) Internal Rate of Return

Internal rate of return is the rate at which the NPV of the investment is Zero.

From above graph we know that at a rate below 4% the NPV will be zero. By using the solver we determine that the IRR for this investment will be approximately, 3.596%

jeff jeffy answered 1 year ago
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