Question

NPV and IRR: Unequal Anual Net Cash Inflows Rocky Road Company is evaluating a capital expenditure proposal that has the following predicted cash flows: Initial investment $(90,220) Operation Year Year 2 Year 3 41,275 60,000 20,000 Salvage (a) Using a discount rate of 14 percent, determine the net present value of the investment proposal. (Round to the nearest whole number.) $ 5,654 X (b) Determine the proposal's internal rate of return. (Round to the nearest whole percentage.) 14 Х%

Answer 1

Computation of Net Present value @14% :. Cash Present Value S Year PVF @14% Flows (S) (90,220) 41,275 60,000 20,000 1.000(90,220.00) 0.87736,206.14 0.769 69 0.675 0.592 Net Present Value 46,168.05 13,499.43 5,653.62 Net Present Value at 14% is = $ 5,654. Rounded off Intenal Rate of Return is the Rate at which the Net Present value of Cashflows is ZERO. This can be clauclated using Trial and Error method for Discount Rate Computation of Internal rate of Return Cash Flows (S) PVF Present Year @18.0168% Value $ (90,220) 41,275 60,000 20,000 1.000(90,220.00) 0.847 34,973.83 0.718 0.608 12,167.42 0.515 43,078.80 Net Present Value 0.05 Internal rate of Return (IRR) is 18.0168% Approx.