Question

Mega Dynamics is considering a project that has the following cash flows:

Year	Project Cash Flow
0	?
1	$2,000
2	3,000
3	3,000
4	1,500

The project has an IRR of 17% . The firm's cost of capital is 11 percent. What is the project's net present value (NPV)?

Answer 1

When we discount cash flows with IRR, the sum of total cash flows will be equal to cash outflow.

Year	Cash flow	Discount Factor at 17%	Discounted Cash flow
1	2,000	0.85470	1,709.40
2	3,000	0.73051	2,191.54
3	3,000	0.62437	1,873.11
4	1,500	0.53365	800.48
Total			6,574.53

From the above, we can see that total discounted cash flow is $6,574.53

Therefore, cash outflow is $6,574.53

Now that we have cash outflow, we can find the NPV using cost of capital at 11%

Year	Cash flow	Discount Factor at 11%	Discounted Cash flow
0	(6,574.53)	1.00	(6,574.53)
1	2,000.00	0.90090	1,801.80
2	3,000.00	0.81162	2,434.87
3	3,000.00	0.73119	2,193.57
4	1,500.00	0.65873	988.10
Total or NPV			843.81

NPV is the sum total of discounted cash inflow minus cash outflow.

Formula for discount factor:

Where,
i = rate of return
n = number of periods

For example, for year 1, at 11%

for year 2, at 11%

and so on..