CHAPTER 21
CAPITAL BUDGETING AND COST ANALYSIS
21-30
NPV, IRR and sensitivity analysis.
1.
Net Present Value of project:
Period
0
1 – 10
Cash inflows
$28,000
Cash outflows
$(62,000)
(18,000)
Net cash flows
$(62,000)
$
10,000
Annual net cash inflows
$
10,000
Present value factor for annuity, 10 periods, 8%
×
6.71
Present value of net cash inflows
$67,100
Initial investment
(62,000)
Net present value
$
5,100
For a $62,000 initial outflow, the project now generates $10,000 in cash flows at the end of
each of years one through ten.
Using either a calculator or Excel, the internal rate of return for this stream of cash flows is
found to be 9.79%.
2.
If revenues are 10% higher, the new Net Present Value will be:
Period
0
1 – 10
Cash inflows
$30,800
Cash outflows
$(62,000)
(18,000)
Net cash inflows
$(62,000)
$12,800
Annual net cash inflows
$12,800
Present value factor for annuity, 10 periods, 8%
×
6.71
Present value of net cash inflows
$85,888
Initial investment
(62,000)
Net present value
$23,888
For a $62,000 initial outflow, the project now generates $12,800 in cash flows at the end of
each of years one through ten.
Using either a calculator or Excel, the internal rate of return for this stream of cash flows is
found to be 15.94%.