Question

About NPV and IRR

There are three cash flows:

C0
-6500
C1
+4000
C2
+18000

a. calculate the NPV of the project for discount rates of 0%, 50%, and 100%.

b. What is the IRR of the project?

Answer 1

a)	Present Value = Future value/ ((1+r)^t)
	where r is the interest rate that is 0% and t is the time period in years.
	Net present value (NPV) = initial investment + sum of present values of future cash flows.
	Year	0	1	2
	cash flow	-6500	4000	18000
	present value		4000	18000
	NPV	15500
	The NPV is $15500.
	Present Value = Future value/ ((1+r)^t)
	where r is the interest rate that is 50% and t is the time period in years.
	Net present value (NPV) = initial investment + sum of present values of future cash flows.
	Year	0	1	2
	cash flow	-6500	4000	18000
	present value		2666.667	8000
	NPV	4166.667
	The NPV is $4166.67
	Present Value = Future value/ ((1+r)^t)
	where r is the interest rate that is 100% and t is the time period in years.
	Net present value (NPV) = initial investment + sum of present values of future cash flows.
	Year	0	1	2
	cash flow	-6500	4000	18000
	present value		2000	4500
	NPV	0
	The NPV is $0.
b)	The internal rate of return (IRR) is the rate of return for which the NPV is zero.
	Use the financial formulas function in excel to calculate the IRR.
	Year	0	1	2
	cash flow	-6500	4000	18000
	IRR	100%
	The IRR is 100%.