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Calculating NPW and IRR

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The Stefinho De Rio company is evaluating two alternatives X and Y to invest for their travel business.

Alternative X Alternative Y
Initial investment $ 1.2 million $1 million
Net annual savings $ 300,000 $250,000
Salvage value $200,000 $200,000
Project life 6 6
The MARR is 12%.

a) Calculate the PW for each alternative.
b) Calculate the IRR for each alternative.
Use interpolation (Hint: Use i = 12% to 18% for interpolation)
c) Which investment is better and why?

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Solution Summary

The solution describes the steps to calculate NPW and IRR for the given investment alternatives. (IRR is calculated by interpolation)

Solution Preview

Please refer attached file for better clarity of tables and formulas.

a) Calculate the PW for each alternative.
Alternative X
Net cash flow in year 0= Initial investment= $1,200,000
Cash flow in year 1 to 6 =Net annual savings=$300,000
Additional Cash flow in year 6=salvage value=$200,000
Net cash flow in year 6=300000+200000=$500,000

Let us see cash flows in year 0 through 6.

Year End Net Cash Flow PW @12%
n Cn Cn/(1+12%)^n
0 -1200000 -1200000
1 300000 267857
2 300000 239158
3 300000 213534
4 300000 190655
5 300000 170228
6 500000 253316
Total 134748
Present worth of alternative X is $134,748.

Alternative Y
Net cash flow in year 0= Initial investment=$1,000,000
Cash flow in year 1 to 6 =Net annual savings=$250,000
Additional Cash flow in year 6=salvage value=$200,000
Net cash flow in year 6=250000+200000=$450,000

Let us see cash flows in year 0 through 6.

Year End Net Cash Flow PW @12%
n ...

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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