Question

Using the following data:

• Initial Investment = $10,000,000
• Cash Inflow – Year 1 = $3,000,000
• Cash Inflow – Year 2 = $3,500,000
• Cash Inflow – Year 3 = $4,000,000
• Cash Inflow – Year 4 = $4,900,000
• Cash Inflow – Year 5 = $5,000,000

1. Calculate Internal Rate of Return
2. Calculate Net Present Value (assuming a required return of 8%)

Answer 1

a.Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$10,000,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 26.46%.

b.Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$10,000,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for all the years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the required rate of return of 8%.
• Press the down arrow and CPT buttons to get the net present value.

Net present value of cash flows at 8% required rate of return is $5,958,354.88.

In case of any query, kindly comment on the solution.