Question

NPV

A new financial analyst at Company X does the following NPV analysis.

Year	After-tax Cash flows	PV @ 12%
0	-100000	-100,000.00
1	30000	26,978.42
2	30000	24,261.17
3	35000	25,453.86
4	35000	22,890.16
5	35000	20,584.68
6	35000	18,511.40

He reports an NPV of $38,679.69, an IRR of 10.93% and a payback period of 5.02 years.

Check these results and correct his analysis if necessary.

Answer 1

Calculate NPV of the company X as follows: $ PV factor = Cash flow 1/(1.12)^Year $ (100,000.00) 1.0000 30,000.00 0.8929 $ 30,000.00 0.7972 $ 35,000.00 0.7118 $ 35,000.00 0.6355 35,000.00 0.5674 $ 35,000.00 0.5066 NPV(SUM OF PV OF CASH FLOWS) PV of cash flows= (Cash flow x PV factor) ($100,000) $26,785.71 $23,915.82 $24,912.31 $22,243.13 $19,859.94 $17,732.09 $35,449.00 6 Thus, NPV of the company X is $35,449.

Calculate IRR for company X as follows: IRR of the Company X is computed the IRR function of excel. Following are the inputs used in the excel: A Year 1 2 3 0 1 4 2 B Cash flow -100000 30000 30000 35000 35000 35000 35000 =IRR(B2:38) 5 3 64 7 5 8 6 9 IRR Following are the results for the inputs used: 1 A Year 0 2 $ 2 $ ovo AWN- Cash flow (100,000.00) 30,000.00 30,000.00 35,000.00 35,000.00 35,000.00 35,000.00 23.35% 64 $ 7 5 $ 6 $ 9 IRR Thus, IRR of the company X is 23.35%.

Calculate payback period for company X as follows: Year $ $ $ Cash flow (100,000.00) 30,000.00 30,000.00 35,000.00 35,000.00 35,000.00 35,000.00 Cumulative cash flow ($100,000) ($70,000) ($40,000) ($5,000) $30,000 $65,000 $100,000 5 6 $ $ Amount left to be recovered after year 3 Payback period = 3 years + Cash flow in year 4 $5000 Las 3 yearst $35.000 =3.14 years Thus, payback period for company X is 3.14 years.