In: Finance
Consider the following
two projects:
Cash flows | Project A | Project B | ||||
C0 | −$ | 280 | −$ | 280 | ||
C1 | 120 | 148 | ||||
C2 | 120 | 148 | ||||
C3 | 120 | 148 | ||||
C4 | 120 | |||||
Project A | |||||
IRR is the rate at which NPV =0 | |||||
IRR | 0.256780467 | ||||
Year | 0 | 1 | 2 | 3 | 4 |
Cash flow stream | -280 | 120 | 120 | 120 | 120 |
Discounting factor | 1 | 1.25678 | 1.579497 | 1.985081 | 2.4948112 |
Discounted cash flows project | -280 | 95.48207 | 75.97355 | 60.45093 | 48.099832 |
NPV = Sum of discounted cash flows | |||||
NPV Project A = | 0.006376837 | ||||
Where | |||||
Discounting factor = | (1 + IRR)^(Corresponding period in years) | ||||
Discounted Cashflow= | Cash flow stream/discounting factor | ||||
IRR= | 25.68% | ||||
Project B | |||||
IRR is the rate at which NPV =0 | |||||
IRR | 0.271340432 | ||||
Year | 0 | 1 | 2 | 3 | |
Cash flow stream | -280 | 148 | 148 | 148 | |
Discounting factor | 1 | 1.27134 | 1.616306 | 2.054876 | |
Discounted cash flows project | -280 | 116.4126 | 91.56679 | 72.02382 | |
NPV = Sum of discounted cash flows | |||||
NPV Project B = | 0.003174004 | ||||
Where | |||||
Discounting factor = | (1 + IRR)^(Corresponding period in years) | ||||
Discounted Cashflow= | Cash flow stream/discounting factor | ||||
IRR= | 27.13% | ||||
b | |||||
Project A | |||||
Discount rate | 0.11 | ||||
Year | 0 | 1 | 2 | 3 | 4 |
Cash flow stream | -280 | 120 | 120 | 120 | 120 |
Discounting factor | 1 | 1.11 | 1.2321 | 1.367631 | 1.5180704 |
Discounted cash flows project | -280 | 108.1081 | 97.39469 | 87.74297 | 79.047717 |
NPV = Sum of discounted cash flows | |||||
NPV Project A = | 92.29 | ||||
Where | |||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||
Discounted Cashflow= | Cash flow stream/discounting factor | ||||
PI= (NPV+initial inv.)/initial inv. | |||||
=(92.29+280)/280 | |||||
1.33 | |||||
Project B | |||||
Discount rate | 0.11 | ||||
Year | 0 | 1 | 2 | 3 | |
Cash flow stream | -280 | 148 | 148 | 148 | |
Discounting factor | 1 | 1.11 | 1.2321 | 1.367631 | |
Discounted cash flows project | -280 | 133.3333 | 120.1201 | 108.2163 | |
NPV = Sum of discounted cash flows | |||||
NPV Project B = | 81.67 | ||||
Where | |||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||
Discounted Cashflow= | Cash flow stream/discounting factor | ||||
PI= (NPV+initial inv.)/initial inv. | |||||
=(81.67+280)/280 | |||||
1.29 | |||||