NPR and IRR

02022009, 02:00 AM
Post: #6




Although, the above solution is right but for exam point of view this is laborious. Why don't you use annuity formula?
Present Value Of Annuity = (1/R) â [1/{R*(1+R)^n}]. Where; R=Interest Rate or Cost of Capital. n=Number of Periods. Now, the solution of your question according to annuity formula is. At Year 21 Annuity Factor is => (1/0.05) â [1/{0.05*(1+0.05)^40}] = 17.159 At Year 18, which is Time 0 Annuity Factor is = > (1/0.05) â [1/{0.05*(1+0.05)^2}] = 1.859 Now The Factor at Year 0 is => 17.159 â 1.859 => 15.3 Present Value of 40 Annuity Receipts is => 15.3 * 5000 => $76,500 <b>NPV of the project is => $76,500 â 18,000 => <font size="4">+</font id="size4"> $58,500</b> <b>For IRR</b> We are already having + NPV of $58,500 at the discount rate of 5%. For current pattern of cash flows, discount rate is inversely related to NPV. It means as we increase the interest rate, NPV will be reduced. If you discount the above cash flows at 25% interest rate you will see a â NPV of $5,203. IRR formula = P rate + [+NPV/+NPV <font size="4"><b></b></font id="size4"> (<b></b>NPV)] * (P rate â N rate). Where, P rate = Rate at +ve NPV N rate = Rate at âve NPV +NPV = Positive NPV of Cash flows NPV = Negative NPV of Cash flows IRR = 5% + [58,500/58,500 â (5,203)]*(255) => 23.4%. <b>IRR = 23.4% at which NPV is Zero.</b> Now, if you discount your cash flows at 23.4% then you roughly get Zero NPV. 

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NPR and IRR  dowerk  01292009, 02:18 PM
[]  Muhammad Amir  02022009 02:00 AM
[]  Muhammad Amir  02022009, 09:07 PM

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