Question

Corporation A plans to launch a new project and the financial manager is considering whether this is a valuable investment for the corporation. Consider: The initial cost of this project is $197.92, and it offers cash flows in the next 3 years, with an estimated cash flow of $ 50 in the first year, $100 in the second year and $150 in the third year. Questions: 1. What is the Internal Rate of Return (IRR) of this project? 2. If we require a discount rate (r) of 10%, what is the Net Present Value (NPV) of this project? Should we invest into this project or not? Please explain step by step your calculations in details.

Please do not use Excell. I need to be answered this exactly step by step, by using formulas and simple tables if needed. Thank you!

Answer 1

1

Project
IRR is the rate at which NPV =0
IRR	0.199990468
Year	0	1	2	3
Cash flow stream	-197.92	50	100	150
Discounting factor	1	1.19999	1.439977	1.727959
Discounted cash flows project	-197.92	41.667	69.44555	86.80762
NPV = Sum of discounted cash flows
NPV Project =	0.000169514
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	20.00%
Accept project as IRR is more than discount rate
2
Project
Discount rate	0.1
Year	0	1	2	3
Cash flow stream	-197.92	50	100	150
Discounting factor	1	1.1	1.21	1.331
Discounted cash flows project	-197.92	45.45455	82.64463	112.6972
NPV = Sum of discounted cash flows
NPV Project =	42.88
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Accept project as NPV is positive