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    Example Prob, NPV, IRR&PI

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    Tin Bernadette Dominico
    This document calculates the net present value (NPV) and internal rate of return (IRR) of two projects, Project X and Project Y. Project X has an initial investment of $40,000 and cash inflows over 5 years. Project Y has an initial investment of $60,000 and cash inflows over 5 years. The NPV of Project X is calculated to be $7,227.90 and the IRR is 17.819%. The NPV of Project Y is $6,987.48 and the IRR is 17.077%. Based on the higher NPV, Project X is recommended to management for acceptance.

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    © All Rights Reserved
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    Example Prob, NPV, IRR&PI

    Uploaded by

    Tin Bernadette Dominico
    48 views10 pages
    This document calculates the net present value (NPV) and internal rate of return (IRR) of two projects, Project X and Project Y. Project X has an initial investment of $40,000 and cash inflows over 5 years. Project Y has an initial investment of $60,000 and cash inflows over 5 years. The NPV of Project X is calculated to be $7,227.90 and the IRR is 17.819%. The NPV of Project Y is $6,987.48 and the IRR is 17.077%. Based on the higher NPV, Project X is recommended to management for acceptance.

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    Example Prob,NPV,IRR&PI

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    This document calculates the net present value (NPV) and internal rate of return (IRR) of two projects, Project X and Project Y. Project X has an initial investment of $40,000 and cash inflows over 5 years. Project Y has an initial investment of $60,000 and cash inflows over 5 years. The NPV of Project X is calculated to be $7,227.90 and the IRR is 17.819%. The NPV of Project Y is $6,987.48 and the IRR is 17.077%. Based on the higher NPV, Project X is recommended to management for acceptance.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    48 views10 pages

    Example Prob, NPV, IRR&PI

    Uploaded by

    Tin Bernadette Dominico
    This document calculates the net present value (NPV) and internal rate of return (IRR) of two projects, Project X and Project Y. Project X has an initial investment of $40,000 and cash inflows over 5 years. Project Y has an initial investment of $60,000 and cash inflows over 5 years. The NPV of Project X is calculated to be $7,227.90 and the IRR is 17.819%. The NPV of Project Y is $6,987.48 and the IRR is 17.077%. Based on the higher NPV, Project X is recommended to management for acceptance.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 10

    NET PRESENT VALUE

    Calculate NPV of the two projects and suggest which of the two should be accepted assuming disc
    What project will you sugggest to the management and why?
    Project X
    Initial investment ₱40,000.00
    Estimated Life 5 years

    Cash Inflows
    Year 1 2
    Project X ₱10,000.00 ₱20,000.00
    Project Y ₱40,000.00 ₱20,000.00

    Project X DF @
    Year Cash Flow 10% Present Value
    0 -₱40,000.00 1 -₱40,000.00
    1 ₱10,000.00 0.909 ₱9,090.91 ₱9,090.91
    2 ₱20,000.00 0.826 ₱16,528.93 ₱16,528.93
    3 ₱20,000.00 0.751 ₱15,026.30 ₱15,026.30
    4 ₱6,000.00 0.683 ₱4,098.08 ₱4,098.08
    5 ₱4,000.00 0.621 ₱2,483.69 ₱2,483.69
    NPV ₱7,227.90
    Simplified Formula: NPV ₱7,227.90

    Answer: We should accept project X since it has a higher net present

    P.I 1.18

    IRR 17.819%
    cepted assuming discount rate at 10%

    Project Y
    ₱60,000.00
    5 years

    3 4 5
    ₱20,000.00 ₱6,000.00 ₱4,000.00
    ₱10,000.00 ₱6,000.00 ₱4,000.00

    Project Y DF @
    Year Cash Flow 10% Present Value
    0 -₱60,000.00 1 -₱60,000.00
    1 ₱40,000.00 0.909 ₱36,363.64 ₱36,363.64
    2 ₱20,000.00 0.826 ₱16,528.93
    3 ₱10,000.00 0.751 ₱7,513.15
    4 ₱6,000.00 0.683 ₱4,098.08
    5 ₱4,000.00 0.621 ₱2,483.69
    NPV ₱6,987.48
    NPV ₱6,987.48

    gher net present value of 7, 227.90 versus project Y which has 6.972 NPV.

    P.I 1.12

    IRR 17.077%
    Discount factor: =1/(1*(1+DISCOUNT RATE)^PERIOD)
    Present Value: =CASHFLOW/(1+DISCOUNT RATE)^PERIOD
    NET PRESENT VALUE =NPV(DISCOUNT RATE,CASHFLOWS:CASHFLOWS)-INITIAL INVESTMENT
    PROFITABILTY INDEX

    Let’s take the example of Project A whose cash flows are depicted below: -

    Initial Investment
    Initial Investment (Cash Outflow hence -ve)
    Year 1 Cash Flow
    Year 2 Cash Flow
    Year 3 Cash Flow
    Year 4 Cash Flow
    Year 5 Cash Flow
    Discounting Factor

    Net Present Value is calculated as:

    Net Present Value

    Profitability Index is calculated using given below formula


    Profitability Index = (Net Present Value + Initial Investment) / Initial Investment

    Profitability Index

    Answer:
    oject A whose cash flows are depicted below: -

    ₱30,000.00 Present Value: =CASHFLOW/(1+DISCOUNT RATE


    -₱30,000.00
    ₱5,000.00
    ₱10,000.00
    ₱15,000.00
    ₱20,000.00
    ₱25,000.00
    30%

    ₱251.22

    nt Value + Initial Investment) / Initial Investment

    ₱1.01

    Since the profitability index is greater than one, this project should be accepted.
    SHFLOW/(1+DISCOUNT RATE)^PERIOD

    should be accepted.
    Internal Rate of return

    Calculate IRR of the two projects.


    What is the IRR of both projects?
    The IRR formula is calculated by equating the sum of the present value of future cash flow less the initial investme

    Initial investment
    Estimated Life

    Cash Inflows
    Year 1
    Project X ₱10,000.00
    Project Y ₱40,000.00

    Project X DF @
    Year Cash Flow 17.820% Present Value
    0 -₱40,000.00 1 -₱40,000.00
    1 ₱10,000.00 0.849 ₱8,487.52
    2 ₱20,000.00 0.720 ₱14,407.61
    3 ₱20,000.00 0.611 ₱12,228.49
    4 ₱6,000.00 0.519 ₱3,113.69
    5 ₱4,000.00 0.440 ₱1,761.83
    NPV -₱0.85
    Simplified Formula: NPV -₱0.85

    Answer: The project x nternal rate of return while project Y is.

    IRR 17.819%
    sh flow less the initial investment to zero.
    Project X Project Y
    ₱40,000.00 ₱60,000.00
    5 years 5 years

    2 3 4 5
    ₱20,000.00 ₱20,000.00 ₱6,000.00 ₱4,000.00
    ₱20,000.00 ₱10,000.00 ₱6,000.00 ₱4,000.00

    Project Y DF @
    Year Cash Flow 17.08% Present Value
    0 -₱60,000.00 78 -₱60,000.00
    ₱8,487.52 1 ₱40,000.00 0.854 ₱34,165.84
    ₱14,407.61 2 ₱20,000.00 0.730 ₱14,591.31
    ₱12,228.49 3 ₱10,000.00 0.623 ₱6,231.55
    ₱3,113.69 4 ₱6,000.00 0.532 ₱3,193.59
    ₱1,761.83 5 ₱4,000.00 0.455 ₱1,818.53
    NPV ₱0.83
    ₱0.83

    ile project Y is.

    IRR 17.077%Excel function


    Discount factor: =1/(1*(1+DISCOUNT RATE)^PERIOD)
    Present Value: =CASHFLOW/(1+DISCOUNT RATE)^PERIOD
    NET PRESENT VALUE =NPV(DISCOUNT RATE,CASHFLOWS:CASHFLOWS)-INITIAL INVESTMENT

    xcel function
    HFLOWS)-INITIAL INVESTMENT

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