a. For the following, calculate the NPV: Investment amount: (2,500,000). Cash fl
ID: 2781927 • Letter: A
Question
a. For the following, calculate the NPV:
Investment amount: (2,500,000). Cash flows: Yr1: 175,000; Yr2: 588,000; Yr3: 1,400,000; Yr4: 1,350,000. Cost of capital: 17%
b. For the following, calculate the NPV:
Investment amount: ($100,000). Cash flows: Yr1: 25,000; Yr2: 38,000; Yr3: 44,000; Yr4: 28,000. Cost of capital: 15%
c. What is the payback period of the following?
Invest $10,000. Get back the following cash flows in years 1-5: 2,000; 3,000; 2,000; 2,000; 10,000.
d. What is the internal rate of return of a project with the following cash flows?
Invest $235,000. Get back the following in years 1-4: 100,000; 75,000; 100,000; 75,000.
e. Calculate the IRR of the following project:
Initial Investment: ($500,000). Cash flows: Yr1: 250,000; Yr2: 100,000; Yr3: (100,000); Yr4: 375,000. (note: Yr3 IS negative).
Please answer all parts or none.
Explanation / Answer
A
Net Present Value = -Initial Investment + Cashflow in year 1/ (1+ cost of capital)1 + Cashflow in year 2/ (1+ cost of capital)2 + Cashflow in year 3/ (1+ cost of capital)3 + Cashflow in year 4/ (1+ cost of capital)4
= -2500000 + 175000/ (1+17%) + 588000/(1+17%)2 + 1400000/ (1+17%)3 + 1350000/(1+17%)4
= -2500000 + 2173660.962 = -326339.04
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B
Net Present Value = -Initial Investment + Cashflow in year 1/ (1+ cost of capital)1 + Cashflow in year 2/ (1+ cost of capital)2 + Cashflow in year 3/ (1+ cost of capital)3 + Cashflow in year 4/ (1+ cost of capital)4
= -100000 + 25000/ (1+15%) + 38000/(1+15%)2 + 44000/ (1+15%)3 + 28000/(1+15%)4
=-100000 + 95412.395 = -4587.605
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C
Payback period is the time period in which the sum invested are recouped.
It will be the number of years in which the sum of cashflows equal the amount invested
Sum Invested = $10000
Sum of Cashflows in year 5 = $2000 + $3000 + $2000 + $2000 + $1000 = $10000
PAyback period = 5 years
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D
IRR is the cost of capital at which NPV = 0
Net Present Value = -Initial Investment + Cashflow in year 1/ (1+ cost of capital)1 + Cashflow in year 2/ (1+ cost of capital)2 + Cashflow in year 3/ (1+ cost of capital)3 + Cashflow in year 4/ (1+ cost of capital)4
NPV = 0 would mean
Initial Investment = Cashflow in year 1/ (1+ IRR)1 + Cashflow in year 2/ (1+ IRR)2 + Cashflow in year 3/ (1+ IRR)3 + Cashflow in year 4/ (1+ IRR)4
$235000 = 100000/(1+ IRR)1 + 75000/ (1+ IRR)2 + 100000/ (1+ IRR)3 + 75000/ (1+ IRR)4
$235 = 100/(1+ IRR)1 + 75/ (1+ IRR)2 + 100/ (1+ IRR)3 + 75/ (1+ IRR)4
This is where we use trial and error and put values until the euation balances.
We can also quickly go to excel and used IRR function
Write cashflows with their signs and use =IRR(A2:A6)
Answer to solution D is 19%
Answer to solution E is 9%
Solution D Solution E -235000 -500000 100000 250000 75000 100000 100000 -100000 75000 375000 19% 9%Related Questions
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