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Calculating IRR and NPV for cash flows of a project

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A project with the expected cash flows:

Year Cash flow
0 - $615,000
1 + 141,000
2 + 300,000
3 + $300,000

What is this project's internal rate of return?
If the discount rate is 0%, what is this project's net present value?
If the discount rate is 4%, what is this project's net present value?
If the discount rate is 8%, what is this project's net present value?
If the discount rate is 12%, what is this project's net present value?

How would this be charted on a graph (x/y axis)? How would you determine a project's internal rate of return?

What would be the NPV of a project requiring a $3.2 million investment with a profitability index of 0.97. How is this determined?

Is IRR or NPV a better method for capital budgeting decisions?

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Solution Summary

Solution describes the steps in calculating NPV of a projet at different discount rate. Then it calculates the IRR for the project.

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Solution :

Present Value = Future Value*(1+r)^-n
r is rate of discount (like 0.06 for 6%)
n is number of period

We will calculate Present Value of Each Cash flow for different Rates of discount with the help of above formula
Net present Value is sum of present Values of all cash flows at a particular discount rate.

Present Values at Discount Rate
Cash Flow 0% 4% 8% 12%
0 -615,000 -615000 -615000 -615000 -615000
1 141,000 141000 135577 130556 125893
2 300,000 300000 277367 257202 239158
3 300,000 300000 266699 238150 213534
Net Present Value 126000 64643 ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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