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Project requires an immediate outlay of $2,250,000 and no capital allowances. Annual cash inflows = $955,000 yearly.

Project requires an immediate outlay of $2,250,000 and no capital allowances. Annual cash inflows = $955,000 yearly. Material costs = $14,400 in the first year, rising at an annual inflation rate of 7.5% per annum. Other expenses = $18,000 in year 1 and these are expected to fall by 7.5% per annum over the life of the project. Factory space used is currently generating rental income . The rental income = $75,000 per annum throughout.


Corporation tax is paid at a rate of 20% and tax is payable one year in arrears.  The weighted average cost of capital is 10%.  A straight line method of depreciation at a rate of 20% is applied to all noncurrent assets.


How can I calculate the Net Present Value (NPV), Internal Rate of Return (IRR) and Payback Period

Top Answer

You can do it in excel by laying out this way. I dont know your project life USD '000 Year 0 1 2 3 4 5 6 Initial Outlay -2250... View the full answer

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USD'III] Year 0 1 2 3 4 5 6
Initial Outlav‘ir —2‘25O
Annual Cash Inflow 955 955 955 955 955 955
Material 00513 [14.4] [15.5] [16.6] [17.9] [13.2] [20.7]
other expenses [18.0] [16.7] [15.4]...

10 comments
  • How did you calculate the IRR and Payback period? Project life is 5 years.
    • e99_bone
    • Jun 09, 2018 at 1:49am
  • IRR is just by using the excel formula ; for 5 years it will be 30% and NPV 1106.03, there's a slight typo depreciation is negative and the workings have to be adjusted
    • KevinHeer
    • Jun 09, 2018 at 1:57am
  • Paybank will be 2.7years
    • KevinHeer
    • Jun 09, 2018 at 1:58am
  • If here was as initial amount of $120,000 spent on research towards knowing about the project, does it count as part of cash outlay at the beginning?
    • e99_bone
    • Jun 09, 2018 at 2:31am
  • Can you send an image of the new calculation with the depreciation now negative?
    • e99_bone
    • Jun 09, 2018 at 2:33am
  • I want to be able to calculate the IRR without using excel form, kindly show the workings for this as well so I can follow
    • e99_bone
    • Jun 09, 2018 at 2:35am
  • Once i post an answer once I can't post a picture Initial Outlay -2250 Annual Cash Inflow 955 955 955 955 955 Material costs (14.4) (15.5) (16.6) (17.9) (19.2) Other expenses (18.0) (16.7) (15.4) (14.2) (13.2) Rental income 75 75 75 75 75 Depreciation -450 -450 -450 -450 -450 PBT 548 548 548 548 548 Tax -110 -110 -110 -110 PAT 548 438 438 438 438 Cash Flow -2250 998 888 888 888 888
    • KevinHeer
    • Jun 09, 2018 at 2:45am
  • You just have to work out the NPV between 2 discount factors which yield you a nogative and positive NPV
    • KevinHeer
    • Jun 09, 2018 at 2:45am
  • What discount factor values did you use?
    • e99_bone
    • Jun 09, 2018 at 3:03am
  • None as excel calculates it for you but if you took 29% and 31% you get a small positive and small negative and no the reseach cost do not count if regardless whether you are doing the project or not you would spend the funds
    • KevinHeer
    • Jun 09, 2018 at 9:14am

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