Question

Calculate NPV, payback period and IRR for the following project given a required return of 10%:...

Calculate NPV, payback period and IRR for the following project given a required return of 10%:

Project z
Time 0 1 2 3 4 5
Cash Flow -11,000 6,230 4,120 1,530 3,500 990
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Answer #1

1)

NPV = Present value of cash inflows - present value of cash outflows

NPV = -11,000 + 6,230 / (1 + 0.1)1 + 4,120 / (1 + 0.1)2 + 1,530 / (1 + 0.1)3 + 3,500 / (1 + 0.1)4 + 990 / (1 + 0.1)5

NPV = $2,223.37

2)

Cumulative cash flow for year 0 = -11,000

Cumulative cash flow for year 1 = -11,000 + 6,230 = -4,770

Cumulative cash flow for year 2 = -4,770 + 4,120 = -650

Cumulative cash flow for year 3 = -650 + 1,530 = 880

650 / 1,530 = 0.42

Payback period = 2 + 0.42 = 2.42 years

3)

IRR is the rate of return that makes NPV equal to 0

NPV = -11,000 + 6,230 / (1 + R)1 + 4,120 / (1 + R)2 + 1,530 / (1 + R)3 + 3,500 / (1 + R)4 + 990 / (1 + R)5

Using trial and error method, i.e., after trying various values for R, lets try R as 20.13%

NPV = -11,000 + 6,230 / (1 + 0.2013)1 + 4,120 / (1 + 0.2013)2 + 1,530 / (1 + 0.2013)3 + 3,500 / (1 + 0.2013)4 + 990 / (1 + 0.2013)5

NPV = 0

Therefore, IRR is 20.13%

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