Year 5 cash flow = $192,000(1.04) = $199,680 So, the NPV of the project is: NPV = + $213,200/1.102 + $153,920/1.103 + $221,520/1.104 + $199,680/1.105 –$575,000 NPV = –$7,872.57 And the IRR of the project is: 0 = + $213,200/(1 + IRR)2 $153,920/(1 + IRR)3 + $221,520/(1 + IRR)4 –$575,000 – + $199,680/(1 + IRR)5 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 9.55% While this may look like a MIRR calculation, it is not an MIRR, rather it is a standard IRR calculation. Since the cash inflows are blocked by the government, they are not available to the company for a period of one year. Thus, all we are doing is calculating the IRR based on when the cash flows actually occur for the company. Calculator Solutions 5. CFo –$145,000 C01 $71,000 F01 1 C02 $68,000 F02 1 C03 $52,000 F03 1 IRR CPT 16.02% 6. CFo CFo –$145,000 –$145,000 C01 $71,000 C01 $71,000 F01 1 F01 1 C02 $68,000 C02 $68,000 F02 1 F02 1 $52,000 $52,000 C03 C03 1 1 F03 F03 I = 10% I = 21% NPV CPT NPV CPT $14,812.17 –$10,524.75 7. CFo CFo CFo –$8,900 –$8,900 –$8,900
Year 5 cash flow = $192,000(1.04) = $199,680 So, the NPV of the project is: NPV = –$575,000 + $213,200/1.102 + $153,920/1.103 + $221,520/1.104 + $199,680/1.105 NPV = –$7,872.57 And the IRR of the project is: 0 = –$575,000 + $213,200/(1 + IRR)2 – $153,920/(1 + IRR)3 + $221,520/(1 + IRR)4 + $199,680/(1 + IRR)5 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 9.55% While this may look like a MIRR calculation, it is not an MIRR, rather it is a standard IRR calculation. Since the cash inflows are blocked by the government, they are not available to the company for a period of one year. Thus, all we are doing is calculating the IRR based on when the cash flows actually occur for the company. Calculator Solutions 5. CFo –$145,000 C01 $71,000 F01 1 C02 $68,000 F02 1 C03 $52,000 F03 1 IRR CPT 16.02% 6. CFo –$145,000 CFo –$145,000 C01 $71,000 C01 $71,000 F01 1 F01 1 C02 $68,000 C02 $68,000 F02 1 F02 1 C03 $52,000 C03 $52,000 F03 1 F03 1 I = 10% I = 21% NPV CPT NPV CPT $14,812.17 –$10,524.75 7. CFo –$8,900 CFo –$8,900 CFo –$8,900
Chap008.docx