Question

Motel Corporation is analyzing a capital expenditure that will involve a cash outlay of $134,200. Estimated cash flows are expected to be $20,000 annually for 10 years. The internal rate of return; find out NPV, PV Index for this investment @ 5%

Answer 1

Cash Outflow = $ 134,200
Cashflow before tax= $ 20,000 Since there is no tax Therefor Cashflow before tax= Cashflow after tax
NPV
Year	Cash flow after tax (a)	PV Factor 5% (b)	Present Value (a*b)
1	$20,000	0.9524	$19,048
2	$20,000	0.907	$18,140
3	$20,000	0.8638	$17,276
4	$20,000	0.8227	$16,454
5	$20,000	0.7835	$15,670
6	$20,000	0.7462	$14,924
7	$20,000	0.7107	$14,214
8	$20,000	0.6768	$13,536
9	$20,000	0.6446	$12,892
10	$20,000	0.6139	$12,278
Present value of Cash Inflow	7.7216	$1,54,432
Cash Outflow	-$1,34,200
NPV	$20,232
For IRR calculation NPV at 9%
Year	Cash flow after tax (a)	PV Factor 9% (b)	Present Value (a*b)
1	$20,000	0.9174	$18,348
2	$20,000	0.8417	$16,834
3	$20,000	0.7722	$15,444
4	$20,000	0.7084	$14,168
5	$20,000	0.6499	$12,998
6	$20,000	0.5963	$11,926
7	$20,000	0.5470	$10,940
8	$20,000	0.5019	$10,038
9	$20,000	0.4604	$9,208
10	$20,000	0.4224	$8,448
Present value of Cash Inflow	6.4176	$1,28,352
Cash Outflow	-$1,34,200
NPV	-$5,848
IRR at 5% positive and 9% negative IRR= Ra + NPVa / NPVa-NPVb * (Rb - Ra) IRR= 5 + 20232 / 20232 - (5848 ) * (9-5) IRR= 5 + 20232/26080 * 4 IRR = 8.10 (NPV = 0) Ra = Lower Rate i.e 5% Rb = Higer Rate i.e 9 % NPVa = Lower rate NPVb= Higher Rate