Question

1. Spence Company is considering a project that has the following cash flow data,
   • Year 0: -$1000, Year 1-5: $350 each, Year 6: -$300.
   • The company is using a WACC of 8%.
   1. What is the NPV of the project .
   2. What is the IRR of the project?
   3. What’s the discounted payback of the project

Answer 1

Year	cash flows	discount factor @ 8 percent	DCF
0	(1000)	1	(1000)
1	350	0.926	324.1
2	350	0.857	299.95
3	350	0.794	277.5
4	350	0.735	257.25
5	350	0.681	238.35
6	(300)	0.630	(189)

Net present value is present value of cash flows less initial investment

So npv is sum of DCF

So npv = 208.15

C) discounted payback period is time taken by the discounted cash flows to recover initial investment

Initial investment is 1000

DCF of first 3 years will recover 901.55

Banlance to be recovered is (1000-901.55) = 98.45

Payback = 3 + 98.45/257.25

= 3.3827 years

3) IRR calculation

IRR is discount rate at which npv will become zero

At 8% discount rate Npv = 208.15

Now we will calculate Npv at 9% discount rate

= 350(PVIFA 9% 5 Y) -300/(1.06)^6 - 1000

= 350(3.8897) - 178.88 -1000

Npv is = 182.515

Now IRR can be calculated by using interpolation formula

Lower rate +[ NPV at lower rate / (NPV at lower rate - NPV at higher rate)] * ( Higher rate - Lowe rate)

= 8% + (208.15)/(208.15-182.515)

= 16.1197%

So IRR is 16.1197%