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+--- Thread: MBA Coursework (/thread-mba-coursework)
MBA Coursework - christopheb - 11-11-2004
Currently preparing a part time MBA. Financial Accountancy is not my strongest subject, any help is really appreciated.
A company has the following cash flows for 2 mutually exclusive projects concerning acquisition of new plant
Project 1 Project 2
£ £
Cost - Immediate Outlay 200,000 120,000
Expected annual net profit/loss
Year1 58000 36000
Year2 (2000) (4000)
Year3 4000 8000
Estimated Residential value 14000 12000
The net profit figures are after deduction of depreciation on a straight line basis. The cost of capital is 10%.
Question
Identify the net present value and internal rate of Return on each project.
- farazthegreat - 11-17-2004
hmmm...........
Pretty sure I can do this but right now too lazy to find the calculator. Also can't recall the formula for IRR.
Anybody wanna help this guy???
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The facts expressed here belong to everybody, the opinions to me. The distinction is yours to draw...
- Apocalypse - 11-17-2004
Project 1
add depriciation amount to NP's
(200000-14000)/3=62000
Yr 1 NP=58000+62000=120000 Present Value=120000/1.1=109090.91
Yr 2 NP=-2000+62000=60000 Present Value=60000/1.1^2=49586.78
Yr 3 NP=4000+62000+14000=80000 PV=80000/1.1^3=60105.18
Total present value profit=(109090.91+49586.78+60105.18)=218782.87
Npv= 218782.87-200000= +18782.87
For IRR let cost of capital to be 25% then NPV=
120000/1.25 = 96000
60000/1.25^2= 38400
80000/1.25^3= 40960
Total= 175360
NPV=175360-200000= (24640)
IRR= 10+ (18782.87*(25-10))/(18782.87+24640)= 6.49%
- christopheb - 11-22-2004
Thanks to Apocalypse for replying to me, but I do not agree with one of the formula
Present Value=120000/1.1
If you check a cumulative Present value table, 10%=0,91 for 1 year as it corresponds to 1/1.1=0.91
I might be wrong, but that's what I found in a book.
Anyone can please confirm or deny?
Thanks in avdance.
- farazthegreat - 11-22-2004
It's the same thing. Whether you multiply by 0.91 or divide it by 1.1
a more general formula would be 1/(1 + i) = v ; where i is the cost of capital
then multiply the amount by v^n ; here n is the no. of years/periods. You have your present value. Do this for each transaction as Apocalypse has done.
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The facts expressed here belong to everybody, the opinions to me. The distinction is yours to draw...
Edited by - farazthegreat on Nov 22 2004 092316 AM