Question

Nominal interest rate=10% compounded semi annually. Today invested 100,000 and expected future cash flow as following:

7 month later inflow:8,000

18 month later inflow: 20,000

15years later inflow: 60,000

28 years later inflow: 90,000

Base on NPV, should we do it or not?

Base on IRR, should we do it or not?

Answer 1

ASSUMING THE QUESTION DOES NOT HAVE ANY TYPO BECAUSE SOMETIMES THE QUESTION SAYS MONTH LATER AND AT OTHER TIMES IT SAYS YEARS LATER

NPV:
=-100000+8000/(1+10%/2)^(2*7/12)+20000/(1+10%/2)^(2*18/12)+60000/(1+10%/2)^(2*15)+90000/(1+10%/2)^(2*28)
=-55426.7093

As NPV is negative, do not accept

IRR:
Let r be the IRR rate compounded semiannually
At IRR, NPV is zero
Hence,
-100000+8000/(1+r/2)^(2*7/12)+20000/(1+r/2)^(2*18/12)+60000/(1+r/2)^(2*15)+90000/(1+r/2)^(2*28)=0
=>r=3.2750%

As IRR is less than the cost of capital of 10%, do not accept