Question

Calculate the Net Present Worth (or Net Present Value), and benefit-cost (B/C) ratio of the following project, assuming an 8% discount rate. Also determine the project’s Internal Rate of Return (IRR).

Year	Cash Flow ($)
0	-400.00
5	-100.00
15	+500.00
30	+2,500.00

Answer 1

NPV = PV of cash inflow- PV of cash outflow

PV of cash ouflow = 400.00 + 100.00*PVIF(8%,5)

= $468.06

PV of cash inflow = 500 * PVIF(8%,15)+2500*PVIF(8%,30)

= $406.06

NPV = 406.06-468.06 i.e. -$62.00

benefit cost ratio= PV of cash inflow/PV of cash outflow

= 406.06/468.06 i.e. 0.867538

IRR is rate at which NPV is Zero

PV of Inflow-PV of outflow =0

500 * PVIF(rate,15)+2500*PVIF(rate,30)-400.00 + 100.00*PVIF(rate,5) =0

Let rate = 7%

500 * PVIF(7%,15)+2500*PVIF(7%,30)-400.00 + 100.00*PVIF(7%,5) =38.34

If r is 8% then NPV =-62

IRR = 7 + (38.34-0)/(38.34+62)

=7.38% approx