Question

Please calculate the NPV and the IRR for a project requiring a return of 12.5%, with an initial investment of ($150,000) plus the following cash flows: Year 1 $55,000; Year 2 $51,000; Year 3 $47,000; Year 4 $42,000. Please calculate the IRR and the NPV.

		A. IRR 11.97% and NPV ($-1,584.82) negative
		B.IRR 11.97% and NPV $1,584.82 positive
		C.IRR 12.50% and NPV ($-1,584.82) negative

Answer 1

The Internal Rate of Return(IRR) is the rate of return at which the project cash outflows are equal the project cash inflows which are discounted at the IRR rate. Year Particulars ($150,000) Initial Investment (A) Yearly Cash Flows Cash Flows $55,000 $55,000 $51,000 $51,000 $ 47,000 $47,000 $42,000 $42,000 ($150,000.00) IRR Calculation using Excel Formula 11.97% IRR(D12:112) Net Present Value is the difference between the present value of future net cash inflow and initial cash outflow/investment. If it is negative then project should rejected and positive then project should be accepted. Year Particulars Yearly Cash Flows Cash Flows (A) Present Value Factor rate 12.5% (B) $55,000 $51,000 $ 47,000 $42,000 $55,000 $51,000 $47,000 $42,000 0.888888889 0.790123457 0.702331962 0.624295077 [1/(1+12.5%)^1] [1/(1+12.5%)^2] [1/(1+12.5%)^3] [1/(1+12.5%)^4] $48,888.89 $40,296.30 $33,009.60 $26,220.39 $ 148,415.18 Present Value of Cash Flows (A) x (B) Total Present value of cash Inflow Net Present Value Present Value of cash inflow $148,415.18 Less: Investment ($150,000.00) Net Present Value ($1,584.82) Correct answer is option (A) i.e. IRR 11.97% and NPV ($-1,584.82) negative