Use the following information for the next three problems, PV of Year Cash Flow

Question

Use the following information for the next three problems,

   PV of

Year

Cash Flow

Cash Flows

1

$14,000

$12,726

2

$14,000

$11,564

3

$10,000

$7,510

4

$10,000

$6,830

5

$8,000

$4,968

6. What is the NPV of above project if the initial investment was $35,000?

7. Calculate the IRR assuming a cost of capital of 11%.

8. Calculate the MIRR of the project assuming a cost of capital of 11%.

   PV of

Year

Cash Flow

Cash Flows

1

$14,000

$12,726

2

$14,000

$11,564

3

$10,000

$7,510

4

$10,000

$6,830

5

$8,000

$4,968

Explanation / Answer

(6)

Sum of PV of cash inflows = $(12,726 + 11,564 + 7,510 + 6,830 + 4,968) = $43,598

NPV = Sum of PV of cash inflows - initial investment = $(43,598 - 35,000) = $8,598

(7) To compute IRR, cost of capital is not required.

IRR is that discount rate which makes NPV equal to zero and is found using approximation method as:

IRR = RL + [NPVL / (NPVL - NPVH)] x (RH - RL) where

RH: Higher interest rate = 12% (assumed),

RL: Lower interest rate = 6% (assumed)

NPVH: NPV at higher rate

NPVL: NPV at lower rate

So, IRR = 6% + [12,963 / (12,963 - 6,673)] x (12 - 6)%

= 6% + [12,963 / 6,290] x 6%

= 6% + 2.06 x 6%

= 6% + 12.36%

= 18.36%

NOTE: First 2 questions are answered.

Year Cash Flow Discount factor@6% Discounted Net Benefit Discount factor@12% Discounted Net Benefit (A) (B) (A) x (B) (C) (A) x (C) 0 -35,000 1.0000 -35,000 1.0000 -35,000 1 14,000 0.9434 13,208 0.8929 12,500 2 14,000 0.8900 12,460 0.7972 11,161 3 10,000 0.8396 8,396 0.7118 7,118 4 10,000 0.7921 7,921 0.6355 6,355 5 8,000 0.7473 5,978 0.5674 4,539 NPV = 12,963 NPV = 6,673

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