If the initial project cost is 500000 then what is

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Unformatted text preview: ount -165,000 63,120 70,800 91,080 • Enter the cash flows, choose F2: IRR to compute the IRR • Result is 16.13%. Approve the project if this is higher than the required return 9-34 IRR example 1 • Calculate the IRR for projects A and B. Approve if the IRR > 15%. Time Project A Project B 0 -250 -250 1 100 100 2 100 200 3 100 0 4 100 0 • Answer: • 21.86% for A so approve • 11.65% for B so reject 9-35 IRR example 2 • A project will generate future cash flows of $45,000 per year for 20 years. If the initial project cost is $500,000, then what is the IRR? • Answer: • If the cash flows are even, then you can use the annuity functions on your calculator. The IRR is the I. • P/YR=1, N=20, PV = -500,000, PMT = 45,000, FV=0, CPT I to get 6.395% 9-36 IRR/NPV example 3 • • The cash flow is -100 at time 0, 60 at time 1 and 60 at time 2. Calculate the NPV using the following discount rates: 1. 2. 3. 4. 5% 10% 13.1% 15% 9-37 Answer to IRR/NPV example 3 • The cash flow is -100 at time 0, 60 at time 1 and 60 at time 2. 1. 2. 3. 4. 5% gives NPV of 11.56 10% gives NPV of 4.13 13.066% gives NPV of 0.00 15% gives NPV of -2.46 • The IRR is 13.066%! (Check this by calculating the IRR for -100, 60, 60) 9-38 Graphical representation 9-39 IRR notes • Over the past few weeks, you’ve done problems like • Given a bond cash flow, find the yield • Given the payments on a loan, find the contract rate • In both circumstances, you are given a cash flow and you solve for the rate • IRR calculations are another application of the same process 9-40 Advantages of IRR • Advantages • Knowing a return is intuitively appealing • It is a simple way to communicate the value of a project to someone who doesn’t know all the estimation details • Generally leads to the same answers as the NPV method • Disadvantages • There are two occasions when IRR and NPV will not be the same: • IRR may result in multiple answers or no answer with nonconventional cash flows • IRR may l...
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This document was uploaded on 02/06/2014.

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