Answer to Question #222396 in Finance for Warri

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 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

i.) PV=120000

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

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

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

$NPV= -120000+23148.15+38580.25+51599.10$

NPV₁= -6672.5

ii.) The investment should not be accepted because the NPV is a negative.

iii.) Using 12% as the discount rate

PV= 120000

1^st$=\frac{25000}{1.12}=22321.42$

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

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

NPV₂$=-120000+22321.43+35873.72+46265.72$

= -15539.13

$IRR=R_1+\frac{NPV_1\times(R_2-R_1)}{{NPV_1-NPV_2}}$

IRR$=6.5$ %