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 December 12th, 2016, 08:26 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 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?
December 12th, 2016, 10:50 AM   #2
Math Team

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Quote:
 Originally Posted by JHY99 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

 December 12th, 2016, 11:28 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, 11:34 AM #4 Math Team   Joined: Oct 2011 From: Ottawa Ontario, Canada Posts: 13,808 Thanks: 971 No idea...contact Warren Buffet?

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