# Calculating NPW and IRR

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?

https://brainmass.com/economics/personal-finance-savings/calculating-npw-irr-385862

#### 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 Summary

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

Calculating project IRR, NPV and depreciation

Introduction

You will assume that you still work as a financial analyst for Aero-Botics, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on a given rate of return of 12%.

Task 4. Capital Budgeting for a New Machine

A few months have now passed and Aero-Botics, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows:

Year 1 $750,000

Year 2 $1,000,000

Year 3 $1,100,000

Year 4 $1,150,000

Year 5 $1,200,000

You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,500,000.

1. What is the project's IRR?

2. What is the project's NPV?

3. Should the company accept this project and why (or why not)?

4. Explain how depreciation will affect the present value of the project.

5. Provide examples of at least one of the following as it relates to the project:

a. Sunk Cost

b. Opportunity cost

c. Erosion

6. Explain how you would conduct a scenario and sensitivity analysis of the project. What would be some project-specific risks and market risks related to this project?

View Full Posting Details