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Utilizing the excel examples in Blackboard create and excel file that answers NPV, IRR, Payback for...
Utilizing the excel examples in Blackboard create and excel file that answers NPV, IRR, Payback for the following situation.
- Initial investment $1000,
- annual cash flow of $300
- Program life for 8 years
- Hurdle rate of 5%
Solutions
Expert Solution
| Answer: | ||||||||
| A) Calculation of NPV | ||||||||
| B) Calculation of IRR | ||||||||
| Formula = | Lower rate + | NPV at lower rate | x (Higher rate - Lower rate) | |||||
| NPV at lower rate - NPV at higher rate | ||||||||
| NPV = | Present value of Cash inflows - Initial cost | |||||||
| Initial cost = | $1000.00 | |||||||
| Present value at lower rate = | 5.00% | Present value at higher rate = | 25% | |||||
| Year | Cash Inflows | Present value factor @ 5% | Present value of cash inflows | Year | Cash Inflows | Present value factor @ 25% | Present value of cash inflows | |
| 1 | 300.00 | 0.95238 | 285.71 | 1 | 300.00 | 0.80000 | 240.00 | |
| 2 | 300.00 | 0.90703 | 272.11 | 2 | 300.00 | 0.64000 | 192.00 | |
| 3 | 300.00 | 0.86384 | 259.15 | 3 | 300.00 | 0.51200 | 153.60 | |
| 4 | 300.00 | 0.82270 | 246.81 | 4 | 300.00 | 0.40960 | 122.88 | |
| 5 | 300.00 | 0.78353 | 235.06 | 5 | 300.00 | 0.32768 | 98.30 | |
| 6 | 300.00 | 0.74622 | 223.86 | 6 | 300.00 | 0.26214 | 78.64 | |
| 7 | 300.00 | 0.71068 | 213.20 | 7 | 300.00 | 0.20972 | 62.91 | |
| 8 | 300.00 | 0.67684 | 203.05 | 8 | 300.00 | 0.16777 | 50.33 | |
| Total | 1938.96 | Total | 998.67 | |||||
| NPV at Lower rate | NPV at higher rate | |||||||
| Present value of cash inflows | 1938.96 | Present value of cash inflows | 998.67 | |||||
| Less: Initial cost | 1000.00 | Less: Initial cost | 1000.00 | |||||
| NPV | 938.96 | NPV | -1.33 | |||||
| IRR | 5% | 938.9638 | x (25-5)% | |||||
| 940.2904 | ||||||||
| IRR | 5% | 0.9986 | *20% | |||||
| IRR | 5% | 19.9718 | % | |||||
| IRR | 24.97% | |||||||
| or 24.95% | (Answer) | |||||||
| A) Calculation of NPV = | $938.96 | |||||||
| B) Calculation of IRR = | 24.95% |
| C) Calculation of payback period | ||||||
| Formula | ||||||
| Payback period = Year before full recovery of cost + Balance cost to be recovered/cash inflow during the year | ||||||
| Calculation of cummulative cash inflow | ||||||
| Year | Cash inflows | Cummulative inflows | ||||
| 1 | 300.00 | 300.00 | ||||
| 2 | 300.00 | 600.00 | ||||
| 3 | 300.00 | 900.00 | ||||
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