Net Present Value Versus Internal Rate of Return For discount factors use Exhibi
ID: 3224871 • Letter: N
Question
Net Present Value Versus Internal Rate of Return
For discount factors use Exhibit 14B-1 and Exhibit 14B-2.
Skiba's cost of capital is 10%.
Required:
1. Compute the NPV and the IRR for each investment. Round present value calculations and your final NPV answers to the nearest dollar. Round IRR answers to the nearest whole percent.
2. Conceptual Connection: Explain why the project with the larger NPV is the correct choice for Skiba.
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NPV IRR Project I $ % Project II $ % Year Project I $(100,000) 134,560 Project II $(100,000) 63,857 63,857Explanation / Answer
1)
Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)
1:
Present value of inflows=134560/1.1^2 =$111,207(approx)
Hence NPV=Present value of inflows-Present value of outflows
=111,207-100,000 =$11207(approx).
2:
Present value of inflows=63857/1.1+63857/1.1^2 = $110,826(approx)
Hence NPV=110,826-100000 =$10,826(approx).
3.
Let irr be x%
At irr,present value of inflows=present value of outflows.
1:
100,000=0/1.0x+134560/1.0x^2; Hence x=IRR=16%(approx).
2.
100,000=63857/1.0x+63857/1.0x^2; Hence x=IRR=17.98%(approx)
=18%(Approx).
2)
Net present value is the difference between the present values of the cash inflows and the cash outflows. It is the net value of all the present values obtained, in other words NPV is the value derived by subtracting all the present value of cash inflow by all present value of cash outflow. NPV is useful to provide final judgment that if a project should be accepted or not by reflecting its overall gain over its expenditure.
Therefore, it can be said that Project I is the correct choice for Skiba.
NPV IRR Project I 1147 16% Project II 10792 18%Related Questions
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