Question

You are considering investing in a start up project at a cost of $150,000. You expect the project to return $550,000 to you in seven years. Given the risk of this project, your cost of capital is 22%.

• What is the NPV of the project
• What is the IRR of the project

pls no excel

Answer 1

Answer:

NPV = $(-13,276.28)

IRR = 20.40%

Calculation:

NPV = -CF₀ + CF₁/(1+i) + CF₂/(1+i)²  + CF₃/(1+i)³ + ...... + CF_n/(1+i)ⁿ

Where CF = Cashflow for particular year, i = cost of capital, n = number of year.

Here we have CF₀ = 150,000 and CF₇ = 550,000

So, NPV = -150000 + 550000/(1+0.22)⁷

= -150000 + 136723.723

NPV = $(-13,276.28)

IRR is the rate when NPV = 0

So,

Initial investment = Cash inflow / (1+ IRR)ⁿ

Where Initial Investment = 150000

Cash inflow = 550000 and n = 7

So,

150000 = 550000 / (1+IRR)⁷

So, (1+IRR)⁷ =550000 / 150000

(1+IRR)⁷ = 3.66667

So, 1+IRR = 1.203955

So, IRR = 20.40%

Hope it will help, If you still need further clarification, comment the same.