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NPV and IRR Analysis for Projects

This document contains solutions to several problems involving capital budgeting techniques: 1. Problem 5.1 evaluates two projects, X and Y, using NPV, IRR, PI, payback period, and discounted payback period. Project Y is better according to IRR, PI, payback period and discounted payback period, but project X has a higher NPV. 2. Problem 5.2 calculates the IRR and NPV at 10% and 30% discount rates for a project. The project is accepted at 10% but rejected at 30%. 3. Problem 5.3 calculates the break-even point for the initial cost of a business with an NPV of -$900,000

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37 views3 pages

NPV and IRR Analysis for Projects

This document contains solutions to several problems involving capital budgeting techniques: 1. Problem 5.1 evaluates two projects, X and Y, using NPV, IRR, PI, payback period, and discounted payback period. Project Y is better according to IRR, PI, payback period and discounted payback period, but project X has a higher NPV. 2. Problem 5.2 calculates the IRR and NPV at 10% and 30% discount rates for a project. The project is accepted at 10% but rejected at 30%. 3. Problem 5.3 calculates the break-even point for the initial cost of a business with an NPV of -$900,000

Uploaded by

Clara Nathania
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

PROBLEM 5.

a. NPV Criterion
50,000 70,000 100,000 425,000
NPV X =−400,000+ + + + =$ 5,155.07 0
1.15 1.152 1.153 1.15 4
37,000 25,000 7,000 23,500
NPV Y =−65,000+ + + + =$ 4,116.32 0
1.15 1.152 1.153 1.154
X because NPV X > NPV Y.

b. IRR criterion
50,000 70,000 100,000 425,000
400,000= + + +
(1+ x) ( 1+ x )2 (1+ x)3 (1+ x)4
x=14.454 % for X

37 , 000 25 ,000 7 ,000 23,500


65,000= + + +
(1+ x ) (1+ x )2 (1+ x )3 (1+ x)4
x=1 8.642 % for Y
Y because the rate of return X < rate of return Y.

c. PI criterion
50,000 70,000 100,000 425,000
PV X= + + + =$ 405,155.07 0
1.15 1.152 1.153 1.154
405,155.070
PI X = =1.013
400,000

37,000 25,000 7,000 23,500


PV Y = + + + =$ 69,116.32 0
1.15 1.152 1.153 1.154
69,116.320
PI Y = =1.06 3
65 , 000
Y because PI X < PI Y.

d. Payback Period criterion


X Y
Year 1 = -400,000+50,000 = -350,000 Year 1 = -65,000+37,000 = -28,000
Year 2 = -350,000+70,000 = -280,000 Year 2 = -28,000+25,000 = -3,000
Year 3 = -280,000+100,000 = -180,000 Year 3 = -3,000+7,000 = 4,000
Year 4 = -180,000+425,000 = 245,000

400,000−( 50,000+70,000+100,000 ) 65 ,000−( 37 , 000+25 , 000 )


PP X=3+ PPY =2+
180,000 7 , 000
¿ 3.424 years ¿ 2.4 29 years
Y because PP X > PP Y.

e. Discounted Payback Period criterion


50,000
Year 1=−400,000+ =−400,000+ 43,478.261=−356,521.73 9
1.15
70,000
Year 2=−356,521.739+ =−356,521.739+52,930.057=−303,591.682
1.152
100,000
Year 3=−303,591.682+ =−303,591.682+65,751.623=−237,840.05 9
1.153
425,000
Year 4=−237,840.059+ =−237,840.0 60+242,995.130−5,155.07 0
1.154
400,000−( 43,478.261+52,930.057+ 65,751.623)
DPP X =3+ =3,979 year s
242,995.130

37,000
Year 1=−65,000+ =−65,000+32,173.913=−32,826.08 7
1.15
25,000
Year 2=−32,826.087+ =−32,826.087+18,903.592=−13,922.49 5
1.152
7,000
Year 3=−13,922.495+ =−13,922.495+ 4,602.614=−9,389.88 1
1.153
23,500
Year 4=−9,389.881+ =−9,389.881+13,436.201=4,046.32 0
1.154
65,000−(32,173.913+18,903.592+ 4,602.614)
DPP Y =3+ =3.322 year s
13,436.201
Y because DPP X > DPP Y.

f. Choose X because even though Y has better IRR, PI, PP, DPP, the direct measure of how well
the project will meet your goal.
NPV X
IRR Y
PI Y
PP Y
DPP Y

PROBLEM 5.2

15.000 17,000 15,000


a. 34,000= + +
( 1+ x ) ( 1+ x )2 ( 1+ x )3
x=18.092 %, accept the project.
15,000 17,000 15,000
b. NPV ( 10 % )=−34,000+ + + =$ 4,955.672 (accept the project)
1.10 1.102 1.103
15,000 17,000 15,000
NPV ( 30 % )=−34,000+ + + =−$ 5,574.875 (reject the project)
1. 3 0 1.3 02 1. 3 03

PROBLEM 5.3

C
a. NPV =−initial cost +
r−g
100,000
NPV =−2,150,000+ =−$ 900,000 (do not start the business)
( 0.15−0.07 )
C
b. To break even, initial cost=
r −g
100,000
2,150,000=
( 0,15−x )
322,500−2,150,000 x=100,00 0
2,150,000 x=222,50 0
x=10.349 %

PROBLEM 5.4

50,000,000
Depreciation= =12,500,000
4
Year 1 Year 2 Year 3 Year 4
EBITDA 31,000,000 25,000,000 33,000,000 29,000,000
Depreciation (12,500,000) (12,500,000) (12,500,000) (12,500,000)
EBIT 18,500,000 12,500,000 20,500,000 16,500,000
Tax (20%) (3,700,000) (2,500,000) (4,100,000) 3,300,000
Net Income 14,800,000 10,000,000 16,400,000 13,200,000

14,800,000+10,000,000+16,400,000+13,200,000
Average Net Income= =13,600,000
4
initial cost + salvage value 50,000,000+0
Average Book Value= = =25,000,000
2 2
13,600,000
AAR= =54.4 %
25,000,000

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