A project requires an initial of $1000 now, and it will return $2000 in 2 years
ID: 2726191 • Letter: A
Question
A project requires an initial of $1000 now, and it will return $2000 in 2 years and $3000 in 4 years Compute NPV(0.02). Compute the internal rale of return B) Suppose that the balance of an investment fund at time 0 is $3000. At the end of three months the balance has grown to $4500 and a contribution of $2000 b made Then at the end of six months the balance has dropped to $3000 and a withdrawal of $1000 is made At the end of the year, the fund balance is $2500. Find the dollar-weighted rate of return.Explanation / Answer
Part A (i)
To compute NPV, we need to calculate PV of all cash flows and then add all the PV of cash flows.
Year
Cash flow
PV factor 2%
PV
0
-1000
1.0000
-$1,000.00
1
0
0.9804
$0.00
2
2000
0.9612
$1,922.34
3
0
0.9423
$0.00
4
3000
0.9238
$2,771.54
NPV
$3,693.87
NPV = 3693.87
(ii)
IRR can be calculated using IRR function in excel:
Year
Cash flow
0
-1000
1
0
2
2000
3
0
4
3000
IRR
73.21%
Year
Cash flow
PV factor 2%
PV
0
-1000
1.0000
-$1,000.00
1
0
0.9804
$0.00
2
2000
0.9612
$1,922.34
3
0
0.9423
$0.00
4
3000
0.9238
$2,771.54
NPV
$3,693.87
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