You are evaluating a project that will require an initial investment of $200. Over the next four years, the project is expected to generate after-tax cash flows of 40, 50, 60, 70. If 8% is your appropriate discount rate, what is the NPV and IRR of this project?
Choices:
21.02, 9.20%
33.67, 10.03%
41.55, 11.88%
-10.55, 6.65%
-21.02, 3.58%
Calculation of NPV | |||
Year | Cash flow | 8% Discounted factor | Discounted cash flows |
1 | 40 | 0.926 | (40*0.926) 37.04 |
2 | 50 | 0.857 | (50*.0.857) 42.87 |
3 | 60 | 0.794 | (60*0.794) 47.63 |
4 | 70 | 0.735 | (70*0.735) 51.45 |
(1) | 178.99 | ||
Initial Investment (2) | 200 | ||
NPV (1-2) | (178.99 - 200) -21.02 |
Discounting factor is computed by following formula-
=(1+8%)^-1
=0.926
Similarly for all years by changing powers to -2, -3 and -4.
Then, discounted cash flows are arrived by multiplying cash flows with discounting factor,
=40 * 0.926
=37.40
Similarly for all years.
Calculation of IRR | |
IRR | |
Year | Cash flows |
0 | -200 |
1 | 40 |
2 | 50 |
3 | 60 |
4 | 70 |
IRR | 3.58% |
IRR is calculated by applying IRR function in excel.
Thus, option D is selected as NPV is -21.02 and IRR is 3.58 %.
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