In: Finance
•You are looking at a new project and you have estimated the following cash flows:
Year 0: CF = -$150,000
Year 1-2: CF = $80,000
Year 3-4: CF = $50,000
Year 5-6: CF = $30,000
Year 7: CF = -$180,000
Your cost of capital is 10%
Please calculate NPV and IRR, and decide whether we should take this project?
Project | ||||||||
Discount rate | 10.000% | |||||||
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
Cash flow stream | -150000 | 80000 | 80000 | 50000 | 50000 | 30000 | 30000 | -180000 |
Discounting factor | 1.000 | 1.100 | 1.210 | 1.331 | 1.464 | 1.611 | 1.772 | 1.949 |
Discounted cash flows project | -150000.000 | 72727.273 | 66115.702 | 37565.740 | 34150.673 | 18627.640 | 16934.218 | -92368.461 |
NPV = Sum of discounted cash flows | ||||||||
NPV Project = | 3752.78 | |||||||
Where | ||||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||||
Discounted Cashflow= | Cash flow stream/discounting factor |
IRR is the rate at which NPV =0 | ||||||||
IRR | 17.14% | |||||||
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
Cash flow stream | -150000.000 | 80000.000 | 80000.000 | 50000.000 | 50000.000 | 30000.000 | 30000.000 | -180000.000 |
Discounting factor | 1.000 | 1.171 | 1.372 | 1.607 | 1.883 | 2.205 | 2.583 | 3.026 |
Discounted cash flows project | -150000.000 | 68297.046 | 58306.081 | 31110.415 | 26559.368 | 13604.448 | 11614.295 | -59491.653 |
NPV = Sum of discounted cash flows | ||||||||
NPV Project = | 0.000 | |||||||
Where | ||||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||||
Discounted Cashflow= | Cash flow stream/discounting factor | |||||||
IRR= | 17.14% |
Accept project as NPV is positive and IRR> cost of capital