Question

You are considering building a shopping mall. The initial investment is ?$1.43. million. The cash flows are?$410,000

for year? 1,200,000 for year?2, $200,000 for year? 3, and ?$170,000 for year 4. What are the net present value? (NPV) and profitability index? (PI) of the project if the cost of capital is 12?%? Compute the internal rate of return? (IRR) for the project.

Answer 1

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=410000/1.12+200,000/1.12^2+200,000/1.12^3+170,000/1.12^4

=$775904.33

NPV=Present value of inflows-Present value of outflows

=$775904.33-$1,430,000

=(654095.67)(Approx)(Negative).

PI=Present value of inflows/Present value of outflows

  =$775904.33/$1,430,000

=0.54(Approx).

Let irr be x%
At irr,present value of inflows=present value of outflows.

1,430,000=410000/1.0x+200,000/1.0x^2+200,000/1.0x^3+170000/1.0x^4

Hence x=irr=(15.49)%(Approx).(Negative).