Net Present Value (NPV) and Internal Rate of Return: Year Outflow Inflow 0 $1,25
ID: 2614073 • Letter: N
Question
Net Present Value (NPV) and Internal Rate of Return:
Year
Outflow
Inflow
0
$1,250,000
1
$0
2
$50,000
3
$150,000
4
$175,000
5
$200,000
6
$250,000
7
$500,000
8
$500,000
Using a discount rate of 6%, what is the net present value of this project? ____________
Using a discount rate of 6.5%, what is the net present value of this project? ____________
What is the internal rate of return (IRR) for this project? ________________
Why did the 6.5% discount rate end up with the result that it did? ______________________
___________________________________________________________________________
Year
Outflow
Inflow
0
$1,250,000
1
$0
2
$50,000
3
$150,000
4
$175,000
5
$200,000
6
$250,000
7
$500,000
8
$500,000
Explanation / Answer
DF = Discounting factor, PV= Present Value
Note:
IRR is that rate of retun at which NPV is 0, so for this project IRR is 6.5%.
When a discount rate of 6.5% is used, it means we are pulling the inflows at a higher rate of return and accordingly PV will also be lower.
Year Inflow($) DF @ 6% PV($) DF @ 6.5% PV($) 0 -1250000.00 1 -1250000 1 -1250000 1 0.00 0.9434 0 0.9390 0 2 50000.00 0.8900 44499.82 0.8817 44082.96 3 150000.00 0.8396 125942.9 0.8278 124177.4 4 175000.00 0.7921 138616.4 0.7773 136031.5 5 200000.00 0.7473 149451.6 0.7299 145976.2 6 250000.00 0.7050 176240.1 0.6853 171333.5 7 500000.00 0.6651 332528.6 0.6435 321753.1 8 500000.00 0.6274 313706.2 0.6042 302115.6 NPV 30985.62 0