Question

A company is planning to make an investment of $100,000 in a Machine. The
company’s analyst had estimated that the useful life of the Machine is 5 years and
that each year (from Year 1 to Year 5), the company will receive a net income of
$35,000 from this investment. The acceptable cost of capital is assumed to be 10%
p.a. Calculate:
a)The net present value (NPV) of this project/investment plan.
b)The internal rate of return (IRR) of this project/investment plan

Answer 1

A company is planning to make an investment of $100,000 in a Machine. The
company’s analyst had estimated that the useful life of the Machine is 5 years and
that each year (from Year 1 to Year 5), the company will receive a net income of
$35,000 from this investment. The acceptable cost of capital is assumed to be 10% p.a. Calculate:
(a) NPV of this project is:
NPV = Cash flows - Investment
Cash flows are CF = -100,000 + 35,000/1.1 + 35,000/1.1^2 + 35,000/1.1^3 + 35,000/1.1^4 + 35,000/1.1^5 = $32,677.54.
(b) IRR is a discount rate, at which NPV = 0, so IRR = 0.221 or 22.1%.