Question

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%

Answer 1

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 %.