Accountancy Forum

Currently preparing a part time MBA. Financial Accountancy is not my strongest subject, any help is really appreciated.

A company has the following cash flows for 2 mutually exclusive projects concerning acquisition of new plant

Project 1 Project 2
£ £
Cost - Immediate Outlay 200,000 120,000
Expected annual net profit/loss
Year1 58000 36000
Year2 (2000) (4000)
Year3 4000 8000
Estimated Residential value 14000 12000

The net profit figures are after deduction of depreciation on a straight line basis. The cost of capital is 10%.

Question
Identify the net present value and internal rate of Return on each project.

hmmm...........
Pretty sure I can do this but right now too lazy to find the calculator. Also can't recall the formula for IRR.

Anybody wanna help this guy???



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The facts expressed here belong to everybody, the opinions to me. The distinction is yours to draw...

Project 1

add depriciation amount to NP's

(200000-14000)/3=62000

Yr 1 NP=58000+62000=120000 Present Value=120000/1.1=109090.91
Yr 2 NP=-2000+62000=60000 Present Value=60000/1.1^2=49586.78
Yr 3 NP=4000+62000+14000=80000 PV=80000/1.1^3=60105.18

Total present value profit=(109090.91+49586.78+60105.18)=218782.87

Npv= 218782.87-200000= +18782.87

For IRR let cost of capital to be 25% then NPV=

120000/1.25 = 96000
60000/1.25^2= 38400
80000/1.25^3= 40960
Total= 175360

NPV=175360-200000= (24640)

IRR= 10+ (18782.87*(25-10))/(18782.87+24640)= 6.49%

Thanks to Apocalypse for replying to me, but I do not agree with one of the formula
Present Value=120000/1.1

If you check a cumulative Present value table, 10%=0,91 for 1 year as it corresponds to 1/1.1=0.91

I might be wrong, but that's what I found in a book.

Anyone can please confirm or deny?
Thanks in avdance.

It's the same thing. Whether you multiply by 0.91 or divide it by 1.1

a more general formula would be 1/(1 + i) = v ; where i is the cost of capital

then multiply the amount by v^n ; here n is the no. of years/periods. You have your present value. Do this for each transaction as Apocalypse has done.




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The facts expressed here belong to everybody, the opinions to me. The distinction is yours to draw...




Edited by - farazthegreat on Nov 22 2004 092316 AM