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December 12th, 2016, 08:26 AM   #1
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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 1-3 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?
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December 12th, 2016, 10:50 AM   #2
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Quote:
Originally Posted by JHY99 View Post
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 1-3 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?
The NPV is -3,701 not 838
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
-5824 / 1.12^4 = -3701
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December 12th, 2016, 11:28 AM   #3
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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?
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December 12th, 2016, 11:34 AM   #4
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No idea...contact Warren Buffet?
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