Question

2. A company is considering launching a new product. The initial startup costs will be $100,000 and the product will provide returns of $40,000 in year 1, 40,000 in year 2 and $31,757.60 in the third year. Calculate the NPV using a MARR of 5% b) Calculate the NPV using a MARR of 7% Calculate the NPV using a MARR of 6% d) Calculate the IRR of the project. a)

Answer 1

2. a), b), c) and d)

NPV is the difference between present value of cash inflows and initial investment or cash outflow.

NPV = Year 1 cash inflow/(1+MARR) + Year 2 cash inflow/(1+MARR)² + Year 3 cash inflow/(1+MARR)³ - initial start-up costs

IRR is the internal rate of return at which present value of cash inflows is equal to initial investment or cash outflow.

initial start-up costs = Year 1 cash inflow/(1+IRR) + Year 2 cash inflow/(1+IRR)² + Year 3 cash inflow/(1+IRR)³

MARR	5%	7%	6%
Years	Cash flows
0	-$100,000	-$100,000	-$100,000
1	$40,000	$40,000	$40,000
2	$40,000	$40,000	$40,000
3	$31,757.60	$31,757.60	$31,757.60
NPV	$1,809.83	-$1,755.61	$0.00
IRR	6.00%	6.00%	6.00%

Calculations

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