# NPV and IRR Example

NPV Example

? Pharmaceutical plant costs $50MM today

? Net cash flows: (no benefit until year 2)

- Year 2: $9MM

- Year 3: $10MM

- Year 4: $11MM

? Assume a no-growth perpetuity after Year 4

? Risk adjusted cost of capita = 14%

? What is NPV?

Internal Rate of Return

? IRR is the break-even rate

? At what rate does the NPV = 0?

? Iterative calculation (many guesses) for calculators

If we know the NPV at 12% is +$5MM, what do we know about the IRR?

If we know the NPV at 12% is -$2MM, what do we know about the IRR?

If we know the NPV at 12% is +$0MM, what do we know about the IRR?

Calculating IRR

? What is the IRR for our pharmaceutical plant? (Higher than 14%!)

? Enter same cash flows, then use IRR to calculate the rate that gives an NPV of 0

? Assume terminal value remains at 78.57

? What is the IRR of our pharmaceutical plant?

? IRR = 23.31%

? No push I to enter 23.31 as the interest rate, then push NPV to give us an NPV of 0 or close.

#### Solution Summary

Discussion and computations guide the learner.