Question

The table below gives the cash flows for a project that last four years. This discount rate is 8.9%

Time	Cash Flow	PV(CF)
0	-192,100	a
1	32,300	b
2	50,600	c
3	73,200	d
4	92,200	e

What is the NPV of the project?

What is the IRR of the project?

What is the Profitability Index of the project?

Answer 1

NPV = sum of present value of cash flows - initial investment or cash flow at year 0

sum of present value of cash flows = year 1 cash flow/(1+discount rate) + year 2 cash flow/(1+discount rate)2 .... + year 4 cash flow/(1+discount rate)4

IRR is the internal rate of return at which present value of cash flows are equal to initial investment or cash flow at year 0.

initial investment = year 1 cash flow/(1+IRR) + year 2 cash flow/(1+IRR)2 .... + year 4 cash flow/(1+IRR)4

Profitability Index = sum of present value of cash flows/initial investment

	Discount rate	8.90%
Time	Cash Flow	PV(CF)
0	-192,100	-192,100.00
1	32,300	29,660.24
2	50,600	42,667.26
3	73,200	56,679.69
4	92,200	65,557.05
NPV	2,464.24	2,464.24
IRR	9.40%
Profitability index	1.01

Calculations