Question

The initial cost of a project is 10% of $122.00. With this new project company is going to receive a cash flow of 1% of revenue of $944 for CF1, $655 for CF2, $1552 for CF3, and $1512 for CF4 and $1627 for CF5.
- What is the NPVand IRR of this.
- should the company proceed with this investment?

Answer 1

Please find the cashflows arrived based on the question

CF0=10%*$122=$12.2

CF1=1%*944=$9.44

CF2=1%*655=$6.55

CF3=1%*1552=$15.52

CF4=1%*1512=$15.12

CF5=1%*1627=$16.27

CF0	-12.2
CF1	9.44
CF2	6.55
CF3	15.52
CF4	15.12
CF5	16.27
IRR	80.2%

Both NPV and IRR needs to be found using NPV and IRR functions in EXCEL

=NPV(rate,Year1 to Year5 cashflows)-Year0 cashflow

To find the NPV, we need to have cost of capital i.e, rate. In the above question it is missing.

If we go with IRR:

=IRR(Year0 to Year5 cashflows)

IRR=80.2% which is very high. Generally, we accept the project if IRR is higher than cost of capital. I don't think so the cost of capital will be higher than IRR. So you can accept the project.

with this high IRR it is obvious that NPV will also be positive and hence you can accept the project