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16. Notational Inc. is considering installing a new server. The machine costs $100,000 and is expected...

16. Notational Inc. is considering installing a new server. The machine costs $100,000 and is expected to have a useful economic life of 8 years, after which it will have a book value of $0. In addition to the equipment costs, management expects installation costs of $10,000 and an initial outlay for net working capital of $12,000. The new server is expected to generate an additional $10,000 per year in earnings after tax over its useful life, but an additional $5,000 per year is required in net working capital. Net working capital will be recovered at the end of 8 years. Assume that National has a cost of capital of 10%. Calculate the NPV and IRR for this project.

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Answer #1

We will First find out NPV of the project in our excel calculations. For that we need to find PV factor for each year.

Formula to find out PV factor = 1 / (1+(R/100))n

Where R is our rate of interest and n being the year for which discounting is done.

Rate of Interest/ Cost of Capital = 10%

Formula for IRR is

PV of Outflow = Inflow1/(1+IRR/100)1+......+Inflow N / (1+IRR/100)n

Where IRR is our rate of return and n being the no of Periods.

IRR is the rate of return which is earned during the lifetime of Investment in the Project.

Let see the excel calculations for NPV & IRR

Our NPV is -$71066.99 and IRR is -12.90%.

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