Consider a project that has a 10% cost of capital that requires an initial investment of...

Consider a project that has a 10% cost of capital that requires an initial investment of $10,000. The year 1 net cash inflow is $2,450; the year 2 net cash inflow is $2,850; the year 3 net cash inflow is $3,350; the year 4 net cash inflow is $3,750; and the year 5 net cash inflow is $5,250. What is the project's discounted payback? NPV? AND IRR?

Expert Solution

a.	Discounted payback		4.10 years

b.	NPV		$ 2,920.69

c.	IRR		19.51%

Working:

Calculation of Discounted payback period and Net present value.

Year	Cash flows	Discount factor	Present value of cash flows	Cumulative Present value of cash flows
a	b	c=1.10^-a	d=b*c	e
0	$ -10,000	1.0000	$ -10,000.00	$ -10,000.00
1	2,450	0.9091	2,227.27	-7,772.73
2	2,850	0.8264	2,355.37	-5,417.36
3	3,350	0.7513	2,516.90	-2,900.45
4	3,750	0.6830	2,561.30	-339.15
5	5,250	0.6209	3,259.84	2,920.69

Discounted payback	=	4+(339.15/3259.84)
	=	4.10

Calculation of IRR:

IRR is the rate at which Net Present value is zero.

Year	Cash flows
0	$ -10,000
1	2,450
2	2,850
3	3,350
4	3,750
5	5,250

IRR	=irr(B15:B20)
	19.51%

jeff jeffy answered 1 year ago

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