Different Forms of Calculations: NPV and IRR

561 Words Jan 7th, 2018 2 Pages
The first questions asked for the NPV of a series of cash flows with a discount rate of zero percent. In this instance, investors are not assuming any risk associated with lending the money over the three year period. As such, the NPV will be position as the cash flows are not being discounted. This situation, although rare, is prevailing in our current market economy with interest rates near 0%. The calculation itself was relative easy as the present value of a series or cash flows with a 0% discount rate is simply the value of the cash flows altogether. Therefore, the NPV is simply all the cash flows from the investment added up (Khan, 1993).

Problem B was similar in concept to that of Problem A. However, a more realistic discount rate was involved. In this instance, the investor had a required rate of return of 5%. Through the calculations, the NPV was ultimately positive. As such, the investor should provide the initial cash outlay.

Finally problem see was a simply IRR calculation using the excel spreadsheet. Through the calculations, the investor or corporation has a 7% hurdle rate before a project can be undertaken (Baker, 2000).

Problem 1 Discount Rate
0%

Problem A

Year
Cash Flow
Present Value $98,000.00
0
-$549,000.00
-$549,000.00

1
$91,000.00
$91,000.00

2
$182,000.00
$182,000.00

3
$374,000.00…
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