Your firm has an opportunity to make an investment of $50,000. Its cost of capit

Question

Your firm has an opportunity to make an investment of $50,000. Its cost of capital is 12 percent. It expects after-tax cash flows (including the tax shield from depreciation) for the next five years to be as follows:

Year 1                          $10,000

Year 2                          $20,000

Year 3                          $30,000

Year 4                          $20,000

Year 5                          $ 5,000

Calculate the NPV.

Calculate the IRR (to the nearest percent)

Would you accept this project?

Explanation / Answer

Answer:-

calculate NPV

net present value = total present value - intital investment

= 61773.5 - 50000 = 11773.5

PV factor = 1/ (1+r)n

calculate IRR (internal rate of return):- LDR + (PVL - inital ) / (PVL - PVH) * (HDR - LDR)

In the uneven cash inflow -

take average of cash inflow = 85000 / 5 = 17000   

pay back period = 50000 / 17000 = 2.941 years

take a look in the present value of anunnity table where 2.941 lies.. in the year 5

20 % = 2.991

21% = 2.926

IRR = 20 + ( 2.991 - 2.941) / (2.991 - 2.926) * (21 - 20)

= 20 + 0.833

IRR = 20.833

while calculating net present value from IRR (20.833 %)

still there is profit of $ 301

accept proposal

year cash inflow PV factor amount 1 10000 0.8928 8928.5 2 20000 0.7972 15944 3 30000 0.7118 21354 4 20000 0.6355 12710 5 5000 0.5674 2837 total 61773.5

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