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Suppose for a project, initial investment is $13,000. The cash flows for next 4 years are...

  1. Suppose for a project, initial investment is $13,000. The cash flows for next 4 years are $2,000, $4,000, $6,000 and $9,000. Calculate the net present value (NPV) and IRR of this project. Should you accept the project?
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Answer #1

1. NPV

INITIAL INVESTMENT = -13000

FUTURE CASH FLOWS = 2000 , 4000 , 6000 , 9000

Assuming the discount rate as 6.3 percent ( nearest to 10 year bond yield)

year 1 = 2000/(1+.063)=1881.46

year 2 = 4000/(1+.063)^2=3539.92

year 3 = 6000/(1+.063)^3=4995.18

year 4= 9000/(1+ .063)^4= 7048.70

TOTAL = 17465.26

SINCE TOTAL INFLOW THAT IS 17465.26 IS GREATER THAN OUTFLOW WE SHOULD TAKE THE PROJECT

2.) IRR ( Assuming x as rate of return)

CASH OUTFLOW = CASH INFLOW

13000= 2000/(1+X)^1 + 4000/(1+X)^2+6000/(1+X)^3+9000/(1+X)^4

X=15.872 %(APPROX)

SINCE RATE OF RETURN IS GREATER THAN COST OF PROJECT (Assumed as 6.3%) WE WILL GO FOR THE PROJECT .

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