Question

4. An investment requires an initial disbursement of € 2,500,000 and the duration of the project is 3 years, in the first of which it generates a cash flow of € 1,500,000, in the second € 3,700,000 and the third € 4,100,000.

1.     Calculate the Net Present Value of the investment, knowing that inflation is 3% cumulative annually and that the required profitability in the absence of inflation is 8%.
2.     Calculate the actual internal rate of return of the previous investment.

Answer 1

Calculating discounting rate adjuted with inflation= (1+ discount rate) (1+ inflation rate)
					(1+ .08)(1+.03)
					1.1124
Therefore discounting rate will be 11.24%
Calculating NPV
Particulars	Amount	PVF	Present value
Initial investment	2500000	1	2500000
Year1	1500000	0.899	1348500
Year2	3700000	0.808	2989600
Year3	4100000	0.726	2976600
Net present value			4814700