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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 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)

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