Question

Cardigan, Inc. is looking at the NPV of a new mixer for its chemical plant. The mixer will cost $1,500,000 and will increase future cash flows for 2021 by $370,000 and for 2022 by $720,000 and for 2023 by $800,000 and for 2024 by $560,000 at the end of which the mixer will be sold for $100,000. What is the NPV of the mixer rounded to the nearest dollar if the cost of capital is 12%? What is the IRR of the mixer rounded to the nearest percent if the cost of capital is 12%?

Answer 1

		Calculation of Net Present Value
			0	1	2	3	4
	A	Cash Flow	(1,500,000)	370,000	720,000	800,000	560,000
	B	Salvage					100,000
	C=A+B		(1,500,000)	370,000	720,000	800,000	660,000
	D	Discount Factor @12%	1.0000	0.8929	0.7972	0.7118	0.6355
	E=C X D	Present Value	(1,500,000)	330,357	573,980	569,424	419,442
		NPV	393,203
		(Sum of present value)
		IRR
		NPV -Discount Factor@25%
			0	1	2	3	4
	A	Cash Flow	(1,500,000)	370,000	720,000	800,000	560,000
	B	Salvage					100,000
	C=A+B		(1,500,000)	370,000	720,000	800,000	660,000
	D	Discount Factor @25%	1.0000	0.8000	0.6400	0.5120	0.4096
	E=C X D	Present Value	(1,500,000)	296,000	460,800	409,600	270,336
		NPV	(63,264)
		(Sum of present value)
		IRR=12%+13%(393203/(393203+63264)) =	23.20%