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FM - 05 Jun 2021

This document discusses computation of net present value (NPV) and internal rate of return (IRR) for a cash flow timeline. It shows examples of calculating NPV at different discount rates, using the rate where NPV equals 0 to determine IRR. A profile of NPV values at increasing discount rates is also presented.

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26 views8 pages

FM - 05 Jun 2021

This document discusses computation of net present value (NPV) and internal rate of return (IRR) for a cash flow timeline. It shows examples of calculating NPV at different discount rates, using the rate where NPV equals 0 to determine IRR. A profile of NPV values at increasing discount rates is also presented.

Uploaded by

uroosa farooq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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1 COMPUTATION OF NPV

0 1
Now
($10,000) 5,300
Negative sign indicates cash outflows
Positive sign indicates cash inflows

WACC = r = 10% = 0.1

Year Cash flows PVIF@10%


0 (10,000) 1.00000
1 5,300 0.90909
2 4,300 0.82645
3 1,874 0.75131
4 1,500 0.68301
NPV

Computing NPV using Excel function

2 COMPUTATION OF IRR

Method ----> find NPV at two different discount 'r'


interpolate and find r for which NPV =0

from above example, we know that for r=10%, NPV = 804.38


take r = 18%, find NPV

WACC = r = 18% = 0.18

Year Cash flows PVIF@18%


0 (10,000) 1.00000
1 5,300 0.84746
2 4,300 0.71818
3 1,874 0.60863
4 1,500 0.51579
NPV

r NPV
0.1 804.38
r 0 By definition, the r that makes NPV =0 , is
0.18 -506.02

To interpolate we use two point formula of staright line.

(x-x1)/ (x2-x1) = (y-y1) / (y2 - y1)

(r-0.1) /(0.18 - 0.1) = (0 - 804.38) / (-506.02 - 804.38)

(r-0.1) / 0.08 = -804.38 / -1310.4

r - 0.1 = 0.08 * 0.6138


r-0.1 = 0.05
r = 0.1+ 0.05 = 0.15 or 15 percent

CHECK
WACC = r = 15% = 0.15

Year Cash flows PVIF@15%


0 (10,000) 1.00000
1 5,300 0.86957
2 4,300 0.75614
3 1,874 0.65752
4 1,500 0.57175
NPV
Computing IRR using Excel function

3 NPV PROFILE

WACC = r = 5% = 0.05

Year Cash flows PVIF@10%


0 (10,000) 1.00000
1 5,300 0.95238
2 4,300 0.90703
3 1,874 0.86384
4 1,500 0.82270
NPV

r NPV
0.050 $1,800.73
0.055 $1,693.79
0.060 $1,588.57
0.065 $1,485.03
0.070 $1,383.14
0.075 $1,282.86
0.080 $1,184.15
0.085 $1,086.98
0.090 $991.32
0.095 $897.13
0.100 $804.38
0.105 $713.05
0.110 $623.10
0.115 $534.50
0.120 $447.23
0.125 $361.25
0.130 $276.55
0.135 $193.09
0.140 $110.85
0.145 $29.80
0.150 ($50.07)
0.155 ($128.80)
0.160 ($206.40)
0.165 ($282.91)
0.170 ($358.33)
cash flow timeline

2 3 4

4,300 1,874 1,500

PV of CFs
(10,000.00)
4,818.18
3,553.72
1,407.96
1,024.52
804.38

$804.38

NPV = 804.38

PV of CFs
(10,000.00)
4,491.53
3,088.19
1,140.57
773.68
(506.02)

tion, the r that makes NPV =0 , is called IRR

6.02 - 804.38)

0.6138
0.05

PV of CFs
(10,000.00)
4,608.70
3,251.42
1,232.19
857.63
(50.07)
14.69%

PV of CFs
(10,000.00)
5,047.62
3,900.23
1,618.83
1,234.05
1,800.73

NPV
$2,000.00

$1,500.00

$1,000.00
NPV
$2,000.00

$1,500.00

$1,000.00

$500.00

$0.00
0.040 0.060 0.080 0.100 0.120 0.140 0.160 0.180

($500.00)

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