Week 2 Assignment Calculations

a) The net present value of each project

To calculate the net present value (NPV) of each project, the following formula can be used:

Annual Cash inflow

NPV = -Initial cash expenditure + n
(1+ Discount Rate )

Where n = the year in question, and the discount rate is the desired rate of return.

For Project A, the NPV can be calculated as follows:

$ 126000 $ 126000 $ 126000 $ 126000

NPV(A) = -$400,000 + + + +
( 1+ 0.08 )1 ( 1+ 0.08 )2 ( 1+ 0.08 )3 ( 1+ 0.08 )4

NPV(A) = $43,829.22

For Project B, the NPV can be calculated as follows:

$ 52,8 00 $ 52,8 00 $ 52,8 00 $ 528 00

NPV(B) = -$160,000 + 1 + 2 + 3 +
( 1+ 0.08 ) ( 1+ 0.08 ) ( 1+ 0.08 ) ( 1+ 0.08 )4

NPV(B) = $47,074.74

b) Approximate Internal Rate of Return

To calculate the approximate internal rate of return (IRR) for each project, the following formula

can be used:

IRR = Lowest discount rate + [(NPV at lowest rate) / (NPV at lowest rate - NPV at next highest

rate)] x (Difference between the two rates)

For Project A, the IRR can be calculated as follows:

$ 43,829.22
IRR(A) = 0.08 + [ ] x (0.02)
$ 43,829.22−$ 15,524.51

IRR(A) = 0.134787 or 13.48%

For Project B, the IRR can be calculated as follows:

$ 47,074.74
IRR(B) = 0.08 + [ ] x (0.02)
$ 47,074.74−$ 10,159.49
IRR(B) = 0.171255 or 17.13%