Question
In: Finance
About NPV and IRR There are three cash flows: C0 -6500 C1 +4000 C2 +18000 a....
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?
Solutions
Expert Solution
| 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%. |
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