Question

A project has the following total (or net) cash flows.

               __________________________________________

              Year          Total (or net) cash flow

               _________________________________________

1 $20,000
2 30,000
3 50,000
4 60,000
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The required rate of return on the project is 15 percent. The initial investment (or initial cost or initial outlay) of the project is $80,000.
a) Find the net present value (NPV) of the project.
b) Find the profitability index (PI) of the project.
c) Calculate the modified internal rate of return (MIRR) of the project.

Answer 1

a)NPV(net Present Value) =Pv of Inflows -initial Outflow

Discount rate =15%

NPV can be computed using the excel function =NPV()

The formula used =NPV(15%,B3:B6)+B2

NPV=$27,256.621

b)PI=PV of inflows /Initial outflow

Pv of inflows =$20,000*.8696+$30,000*.7561+$50,000*.6575+$60,000*.5718=$107,258

Initial outlay=$80,000

PI=$107,258/$80,000=1.341

c)The MIRR (modified Internal rate of return) assumes that the inflows are reinvested at the cost of capital of the firm.It can be determined using excel using the function=MIRR() The formula used =MIRR(B2:B6,15%,15%) MIRR =23.75%