Question

As investment with a 3year life and a cost of #120000 generates revenue of #25000 in year 1 #45000 in year 2 and #65000 in year 3. If the discount rate is 8%

(i) what is the NPV of the investment.

(ii) state whether the investment should be accepted or not and why.

(iii) using 12% as your second discount rate, to solve the remaining part of the question under IRR.

Answer 1

Solution

$YEAR_ 1= \frac{25000}{1.08}=23148.14$

$YEAR _2=\frac{45000}{1.08^2}=38580.25$

$YEAR_ 3=\frac{65000}{1.08^3}=51599.10$

$NPV= -120000+23148.15+38580.25+51599.1$

NPV1= -6672.5

Ii.) Negative NPV, investment should not be accepted

12% discount

PV= 120000

$YEAR_1=\frac{25000}{1.12}=22321.42$

$YEAR_2=\frac{45000}{1.12^2}=35873.72$

$YEAR_3=\frac{65000}{1.12^3}=46265.72$

$NPV_2=−120000+22321.43+35873.72+46265.72 = -15539.13$

t=3

$IRR=\sum\frac{C_t}{(1+r)^t}-C_o$

t=1

t= number of years

Co = initial investments

t= Number or periods

r= Discount rate

$IRR= 6.469$ %