Frost Company forecasts the launch of its new product with the following project

Question

Frost Company forecasts the launch of its new product with the following projected cash flows for each

year. Initial investment in the project (including working capital) is $50,000. No salvage value at the end

of the project.

Year Cash Flow Amount

1 $22,500

2 $21,000

3 $12,000

4 $8,500

1. Using an opportunity cost of capital of 12%, what is the Net Present Value? [Excel Formula = NPV]

[Hint: NPV of Cash Flows – Initial Investment = Net Present Value]

2. What would be the project IRR using the above data? [EXCEL Formula = IRR]

Explanation / Answer

Calculation of NPV Year Cash flows PVF@12% Present value of cash flows 1 22500 0.893 20092.5 2 21000 0.797 16737 3 12000 0.712 8544 4 8500 0.636 5406 50779.5 $ Initial Investment 50000 $ NPV 779.5 $ Calculation of IRR Year Cash flows PVF@12% Present value of cash flows PVF @20% PV of cashflows 1 22500 0.893 20092.5 0.833 18742.5 2 21000 0.797 16737 0.694 14574 3 12000 0.712 8544 0.579 6948 4 8500 0.636 5406 0.482 4097 50779.5 $ 44361.5 Present value of cashflows @12% 50779.5 Present value of cashflows @20% 44361.5 Change for 8% 6418 Present value of cashflows @12% 50779.5 Desired Value 50000 Desired change 779.5 (8/6418)= 0.001246 (779.5*0.001 246)=0.971642 IRR 10.97%

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