NPV and IRR Calculations Ex. 1 A project will cost Rs 50,000 today.

It is expected to generate cash flows of Rs 30,000, Rs 25,000 and Rs 15,000 each year through year 1 to 3. The discount rate is 18 percent. Calculate the project's NPV and IRR. IRR of An Investment Project Year Cash Flow (Rs) 0 C0 -50000 1 C1 30000 2 C2 25000 3 C3 15000 IRR IRR(E8:E11) 21% NPV NPV(.18,E9:E11)+E8 ##########

Ex. 2

From the cash flows given in the following table, calculate NPV at different discount rate. Draw an NPV profile of the project. Hint: Notice that cash flows are constant, and the discount rate changes. Write the NPV formula in F22 and copy. Go to Insert>chart to draw the NPV profile.

NPV Profile Cash Flow -20000 8000 7000 6000 5000 4400 2400 Discount rate 0% 5% 10% 15% 16% 20% 25% NPV 12,800 8,503 5,068 2,279 1,777 (17) (1,929)
14,000 12,000 10,000 8,000 6,000 4,000 2,000 (2,000) 0% (4,000)

IRR
16% 10% Discount rate

Figure NPV Profile Ex. 3

From the following cash flows, calculate Project's NPV (i) without using Excel built-in function, and (ii) using Excel built-in function. Hint: You will have to determine PVF at 10% and multiply each cash flow by its PVF to obtain discounted cash flow (DCF). Sum all DCFs to obtain NPV. Cash flow 0 C0 1 C1 2 C2 3 C3 4 C4 5 C5 NPV NPV(0.1,C28:C32)+C27 Year PVF at 10% -2500 1.000 900 0.909 800 0.826 700 0.751 600 0.683 500 0.621 226 SUM(E27:E32) PV -2500 818 661 526 410 310 226

Ex. 4

M and N are two mutually exclusive project. The cash flows are shown below. Calculate projects' NPV at 9% and IRR. Why these two methods rank projects differently? Show your calculations. NPV Project M Project N -3360 2800 1400 280 IRR 23% NPV 603 Discount Rate -3360 280 1680 3020 17% 643 0% 5% 10% 15% 20% 25% 30% Project M Project N 1120 818 553 317 108 -81 -250 2100 1600 1620 1039 552 139 -212 -515 -776 1100 600 100 0% NPV and IRR methods rank project's differently because their cash flow patterns are different. Project M returns more cash flows earlier than Project N. At 10% discount rate two projects obtain the same NPV; this is a break-even rate. -400 NPV

Ex. 5

A project has an initial cash outflow of Rs 1,000 followed by a cash inflow of Rs 4,000 after one year and a cash outflow of Rs 3,750 after two years. Determine the project's NOV at discount rates of 0%, 50%, 100%, 150% and 200%. Draw the project's NPV profile and interpret the results. Cash flow Discount rate -1000 4000 -3750 NPV 0.50 1.00 1.50 2.00 0 50 100 150 200 -750 0 63 0 -83 -750 63 -83
NPV (Rs) 250 NPV Rs 63 0 -250 -500 -750 0 50 100 150 200 Discount Rate (%)

Since cash flows of project change signs twice, there are two IRRs. NPV is`zero at 50% and 150%. Notice that NPV is negative at 0% and 200%. The figure shows that NPV is positive when the discount rate ranges between 50% and 150%.

IRR

20% Discount rate

30%

e NPV Profile

Project M Project N

NPV Rs 276

10%

20% Discount Rate

30%

40%

200

250