Question

Assume the following CFs, what is the PV, the NPV, and the IRR? Use the WACC as your required return. What is the most you should pay for the set of cash flows and earn your WACC? WACC is 11.55%. Do not use excel.

Year	0	1	2	3	4	5	6	7
Investment	-200,000
OCF		50,000	60,000	40,000	70,000	15,000	0.00	-10,000
Terminal CF								78,000

Answer 1

Computation of NPV
Year	Cashflows	PVF@ 11.55 %	PV
0	-200000	1.0000	-200000.00
	PV of Cash Outflows		-200000.00
1	50000	0.8965	44822.95
2	60000	0.8036	48218.32
3	40000	0.7204	28817.17
4	70000	0.6458	45208.46
5	15000	0.5790	8684.47
6	0	0.5190	0.00
7	68000	0.4653	31638.94
	(-10,000 + 78,000)
	PV of Cash Inflows		207390.31
NPV	= B-A		7390.31

PV of the Project = PV of Cash Inflows = 207,390.31

NPV of the Project = PV of Cash Inflows - PV of Cash Outflows = 7,390.31

Max Amount that can be pid = PV of the Project = 207,390.31

	Computation of IRR of Project
	Let us discount at 12%
	Year	Cashflows	PVF at 12%	PV of Cashflows	PVF at 13%	PV of Cashflows
A	0	$      (200,000)	1.0000	$       (200,000)	1.0000	$         (200,000)
		PV of Cash Outflows	$       (200,000)		$         (200,000)
B	1	$          50,000	0.8929	$            44,643	0.8850	$              44,248
	2	$          60,000	0.7972	$            47,832	0.7831	$              46,989
	3	$          40,000	0.7118	$            28,471	0.6931	$              27,722
	4	$          70,000	0.6355	$            44,486	0.6133	$              42,932
	5	$          15,000	0.5674	$              8,511	0.5428	$                8,141
	6	$                    -	0.5066	$                     -	0.4803	$                       -
	7	$          68,000	0.4523	$            30,760	0.4251	$              28,904
		PV of Cash Inflows	$   204,703.11		$      198,936.43
C	NPV	= B-A		$        4,703.11		$        (1,063.57)

IRR is the Rate at which PV of Cash Infows will be equal to PV of Cash outflows, i.e., NPV = 0

The Present Value of Cash Inflows at 12% are more than Initial Cash Outflow.

Hence higher discount rate is suggested, say 13%

The Present Value of Cash Inflows at 13% are less than Initial Cash Outflow.

The IRR is thus morethan 12% but lessthan 13% .

The exact rate can be obtained by Interpolation.

IRR = [12+((204,703.11 - 200,000)/(204,703.11 - 198,936.43))*(13-12)]

IRR = 12.82%