Question

I am uncertain how to use this formula?

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.

In the first place, you must update the profitability required by applying the formula:

p = k+g+(k*g)            Note: p (profitability) might sometimes appear as r

Take into account that the Net Cash Flows already include the effect of inflation, and therefore you must only use it to update the profitability.

After this, apply the NPV (Net Present Value) formula.

In subquestion B, first of all you must calculate the IRR (Internal Rate of Return) of the previous project. In order to obtain the Real Internal Profitability you must apply the following formula:

P_r = TIR-g1+g                                            

In which g is the inflation.

Answer 1

authlon & € 2,500,000 of 0 Tahcours & Perad! + 1,500,000 lewad a 3,200,000 leuod 3 + 64,400,000 @ Nee Present Value (MPV) is the sum of present values of all expected cash flowes subetracted by the initial auflow MPV : - €2,500,000 €1,500,000 £3,200,000 £4,000,000 (1 40-41)' Treo-ety? (to...) €4,002,239-018 Candy I requited fate of Return in reanibal tread a expected tuftation keal Required Rate & Return Sy ey. (6) Interest Rate of Return CIRR) is the discount rate that makes present value of inflores equal to the outflow, cie. contike aebusement. Tride-and-esor neethod should be need to calculate IR of a financial calculator Calculation! 02-2,500,000 + 1,500,000 1.LDO,07 4,000,000 (ltler)' Ritiny? Cierre)s loening the equation by treal-and-ceror, IRR a 26. 50 %. Cons)