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December 12th, 2016, 07:26 AM  #1 
Newbie Joined: Dec 2016 From: Indiana Posts: 2 Thanks: 0  NPV and IRR problems
Can someone check if I did part 1 correctly and help explain part 2? 1. Alpha is considering Project A with a cost of capital of 6% A: 10,000, 3500, 3500, 3500 to calculate the NPV I did 10,000 + 3500/1.06 + 3500/(1.06^2) + 3500/(1.06^3) = 644.46 I used a ti 84 plus to calculate the IRR which I got 2.48 so the NPV < 0 which is the investment would subtract value from the firm and the IRR which is 2.48 is less than the 6% cost of capital. I should reject Plan A 2. Delta Co. is considering Project D D: 3,000, 5000, 5000, 5000, 20,000 The IRR I was given was 8.1 and the NPV at 12 percent was 838. The NPV is > 0 but the IRR is < the cost of capital. I don't think I should accept the project because the cash outflow starts out positive cash flows in years 13 with 5000 but in year 4 its 20,000. But the NPV is positive so it would still add value. Is there a way to check this with numbers or can someone explain to me if I should accept this? 
December 12th, 2016, 09:50 AM  #2  
Math Team Joined: Oct 2011 From: Ottawa Ontario, Canada Posts: 12,124 Thanks: 800  Quote:
Code: 0 3,000 1 5,000 360 1,640 2 5,000 197 6,837 3 5,000 820 12,657 4 20,000 1,519 5,824  
December 12th, 2016, 10:28 AM  #3 
Newbie Joined: Dec 2016 From: Indiana Posts: 2 Thanks: 0 
I did the math and got the same answer as you. 5000/1.12+ 5000/(1.12^2) + 5000/(1.12^3) + 20000/(1.12^4)  3000 = 3701 But in the question they tell me that IRR= 8.1 and NPV = 838 Maybe its a typo. I guess the word problem is asking if NPV > 0 but the IRR < cost of capital, do I accept the project? 
December 12th, 2016, 10:34 AM  #4 
Math Team Joined: Oct 2011 From: Ottawa Ontario, Canada Posts: 12,124 Thanks: 800 
No idea...contact Warren Buffet? 

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