Question

A company is considering investing in a project with an initial cost of $250,000. The cost of capital is 15%. The project will generate $100,000 every year for four years. Calculate the NPV & IRR & determine if they should invest in this project.

Answer 1

Based on the given data, pls find below workings:

Currency in $
YEAR	0	1	2	3	4
Cash Flows	-2,50,000	1,00,000	1,00,000	1,00,000	1,00,000
Cumulative Cash flows	-2,50,000	-1,50,000	-50,000	50,000	1,50,000
		12	12	6
Pay Back Period	2.5
IRR %	21.9%
Discounting Factor		15.00%
YEAR	0	1	2	3	3
Discounting Factor	1.0000	0.8696	0.7561	0.6575	0.5718
						NPV
Discounted Cash Flow	-2,50,000	86,957	75,614	65,752	57,175	35,498
Cumulative Discounted Cash flows	-2,50,000	-1,63,043	-87,429	-21,677	35,498
		12	12	12	5
Discounted Pay Back Period	3.4

Based on the above, the NPV of the project is positive $ 35498 and the IRR is 21.9% (higher than cost of capital) and Payback period is 2.5 years; Hence, it is recommeded to invest in this project.