(IRR, payback, and calculating a missing cash flow) Mode Publishing is considering building a new printing facility that will involve a large initial outlay and then result in a series of positive cash flows for 4 years. The estimated cash flows associated with this project are:
Year |
Project Cash Flow |
0 |
? |
1 |
800 Million |
2 |
400 Million |
3 |
500 Million |
4 |
100 Million |
If you know that the project has a regular payback of 2.8 years, what is the initial cash outlay of the project? (Round to the nearest whole number)
What is the project's internal rate of return? (Round to two decimal places)
Intial investment = 1*CF1 + 1*CF2 + 0.8*(CF3)
=800+400+0.8*500=1600
IRR is the rate at which NPV =0 | |||||
IRR | 6.34% | ||||
Year | 0 | 1 | 2 | 3 | 4 |
Cash flow stream | -1600.000 | 800.000 | 400.000 | 500.000 | 100.000 |
Discounting factor | 1.000 | 1.063 | 1.131 | 1.203 | 1.279 |
Discounted cash flows project | -1600.000 | 752.297 | 353.720 | 415.785 | 78.198 |
NPV = Sum of discounted cash flows | |||||
NPV Project = | 0.000 | ||||
Where | |||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | ||||
Discounted Cashflow= | Cash flow stream/discounting factor |
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