Purchase Solution

Internal rate of return and NPV

Not what you're looking for?

Ask Custom Question

(a) A capital investment requiring one initial cash outflow is forecast to operating profits (cash) as follows

Year 1 $74,000
Year 2 $84,000
Year 3 $96,000
Year 4 $70,000

The investment has an NPV of $20,850 based on a required rate of return of 12%. Calculate the payback period of the investment.

(b) The initial investment and expected profits (cash) from 2 mutually exclusive capital investments being considered by a firm are as follows:
Investment A Investment B
Initial Investment 70,000 65,000
Year 1 profit 30,000 50,000
Year 2 profit 80,000 50,000

(i) Calculate the internal rate of return for each investment. Which one would be selected based on an IRR ranking?
(ii) Which investment should be chosen if the firm's cost of capital is 14% (support your answer)?
(iii) Which investment should be chosen if the firm's cost of capital is 17% (support your answer)?

Purchase this Solution
Solution Summary

This shows how to compute Internal rate of return NPV and payback supported by examples

Solution Preview

See the attached file.

A capital investment requiring one initial cash outflow is forecast to operating profits (cash) as follows

Year 1 $74,000
Year 2 $84,000
Year 3 $96,000
Year 4 $70,000

The investment has an NPV of $20,850 based on a required rate of return of 12%. Calculate the payback period of the investment.

NPV= Present value of inflows- Initial investment outlay

Present value of Inflows- NPV= Initial investment outlay

Thus Present value of inflow=

Year Cash Flow Present ...

Purchase this Solution
Free BrainMass Quizzes
Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

Business Ethics Awareness Strategy

This quiz is designed to assess your current ability for determining the characteristics of ethical behavior. It is essential that leaders, managers, and employees are able to distinguish between positive and negative ethical behavior. The quicker you assess a person's ethical tendency, the awareness empowers you to develop a strategy on how to interact with them.

Basics of corporate finance

These questions will test you on your knowledge of finance.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Six Sigma for Process Improvement

A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.

View More Free Quizzes
Related BrainMass Solutions

  • Valuation Methodologies - NPV, IRR, and MIRR

    Briefly describe the following three key valuation methodologies that companies use - Net Present Value (NPV), Internal Rate of Return (IRR), and Modified Internal Rate of Return (MIRR). Please site any sources and provide references.

  • Multiple Choice

    the internal rate of return equals zero b) the internal rate of return exceeds the cost of capital At the internal rate of return, the NPV is zero, if the NPV is positive this implies that IRR is higher since as we increase the rate the NPV will

  • NPV of future cash flows

    NPV of future cash flows is equal to zero at discount rate = 'internal rate of return'. i.e, if we discount the future cash flows with the internal rate of return, our NPV = 0 [ internal rate of return tells us how much return are we getting for out investment

  • Internal rate of return

    ( As NPV depends on cash flow of the life of the project) Solution discusses internal rate of return

  • Internal rate of return using interpolation

    Determine the internal rate of return using interpolation. b. With a cost of capital of 12 percent, should the machine be purchased? a. Determine the internal rate of return using interpolation. IRR is the rate at which the NPV=0.

  • Healthcare Finance: NPV and IRR

    In another word, the internal rate of return (IRR) is a rate of return used in capital budgeting to measure and compare the profitability of investments.

  • better method for making capital budgeting - IRR or NPV

    Internal rate of return (IRR) is the flip side of net present value (NPV) and is based on the same principles and the same math.

  • NPV and Internal Rate of Return

    How do I find the NPV and the internal rate of return for the project? Please see attached Excel file for detailed response to your posting. Excel file contains calculations of NPV and internal rate of return.

  • NPV/IRR of a real estate investment

    The investment is not attractive as the NPV is negative and IRR is less than the required rate of return. The solution explains how to calculate the NPV and IRR of a real estate investment project.

  • Importance of IRR and NPV in capital budgeting/planning

    This question addresses the importance of the internal rate of return (IRR) and net present value (NPV) to an organization in the capital planning/budgeting process.

View More Related Solutions