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August 21st, 2011, 01:15 AM   #1
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Investment

Present value & investment Appraisal

Bell plc invests in a new machine which costs $15,000. It is hope that the net cash flows over the next five years will correspond to those given in the list below:

Year1 : Net cash flow $1500
Year2: Net cash Flow $2750
Year3: Net cash flow $4000
Year4: Net cash Flow $5700
Year5: Net cash Flow $7500

1) Calculate the net present value of the investment using a discount rate of 15% ?
2) Using the above project in the question, obtain also the NPV for a cost of interest of 8% and thus estimate the internal Rate of return.


Thank you!
lizartt
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August 21st, 2011, 06:25 AM   #2
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Re: Investment

The NPV at 15% rate of interest is -1998.37 and at 8% rate of interest is 1215.95. The cash flows have an IRR of 10.4% thus making this project suitable only at the interest rat of 8%

NPV calculations were performed with this online http://thinkanddone.com/en-us/online...lculation.html tool
& IRR calculations were performed with this online http://thinkanddone.com/en-us/online...lculation.html tool

NPV @ 15%
DCF0 = -15000/(1+0.15)^0 = -15000
DCF1 = 1500/(1+0.15)^1 = 1304.35
DCF2 = 2750/(1+0.15)^2 = 2079.4
DCF3 = 4000/(1+0.15)^3 = 2630.06
DCF4 = 5700/(1+0.15)^4 = 3258.99
DCF5 = 7500/(1+0.15)^5 = 3728.83
NPV = -1998.37

NPV @ 8%
DCF0 = -15000/(1+0.0^0 = -15000
DCF1 = 1500/(1+0.0^1 = 1388.89
DCF2 = 2750/(1+0.0^2 = 2357.68
DCF3 = 4000/(1+0.0^3 = 3175.33
DCF4 = 5700/(1+0.0^4 = 4189.67
DCF5 = 7500/(1+0.0^5 = 5104.37
NPV = 1215.94

IRR Calculation

f(x) = -15000(1+i)^0 +1500(1+i)^-1 +2750(1+i)^-2 +4000(1+i)^-3 +5700(1+i)^-4 +7500(1+i)^-5

f'(x) = -1500(1+i)^-2 -5500(1+i)^-3 -12000(1+i)^-4 -22800(1+i)^-5 -37500(1+i)^-6

x0 = 0.1
f(x0) = 191.7095
f'(x0) = -48892.8189
x1 = 0.1 - 191.7095/-48892.8189 = 0.103921014637
Error Bound = 0.103921014637 - 0.1 = 0.003921 > 0.000001

x1 = 0.103921014637
f(x1) = 1.7026
f'(x1) = -48027.5553
x2 = 0.103921014637 - 1.7026/-48027.5553 = 0.103956464273
Error Bound = 0.103956464273 - 0.103921014637 = 3.5E-5 > 0.000001

x2 = 0.103956464273
f(x2) = 0.0001
f'(x2) = -48019.8199
x3 = 0.103956464273 - 0.0001/-48019.8199 = 0.103956467113
Error Bound = 0.103956467113 - 0.103956464273 = 0 < 0.000001
IRR = x3 = 0.103956467113 or 10.4%
PJHooker is offline  
August 21st, 2011, 02:01 PM   #3
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Re: Investment

I also already addressed this question over here:
http://www.mymathforum.com/viewtopic...p=90144#p90144

But I see no attempt at trying to do this problem either. If you do not understand something, you can return and ask questions about it, show your attempts and someone can see whether you're on the right track of not. You LEARN by this method. Ever heard of that word, learning?

Instead you've ignored both my posts, ignored the fact that I took the time out to try to help you understand (gee, you're welcome), just posted your questions again, and found yourself someone who was willing to just do all the work for you! People like you just infuriate the heck out of me.
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