1. avatar says

    Sir could you please explain this

    Q. The following information relates to a two year project

    initial investment $1 million
    cash inflow year 1 $750000
    cash inflow year 2 $500000
    cost of capital year 1 10%
    cost of capital year 2 15%
    What is the NPV of project (to nearest $500)
    Thanks in advance

    • Avatar of johnmoffat says

      You need to discount the time 1 flow using the 1 year discount factor at 10% from the tables.
      For the time 2 flow you need to discount for 1 year at 10% and 1 year at 15%, so multiply together the 1 year factors at 10 and 15%.

  2. avatar says

    Goodnight John Moffat

    Please walk me through this question: At an interest rate of 15% the net present valve of a project is $2,500.

    At an interest rate of 20%, the net present valve falls to minus $4,000.

    What is the Internal Rate of Return of the Project

    • Avatar of johnmoffat says

      The net present value (not valve :-) ), falls by 6,500 over a chang of 5%’s.

      At 15% the NPV is 2500, and so we want it to fall by 2,500 to get an NPV of zero.
      A fall of 2,500 will be 2500/6500 x 5%.

      If you add this to the 15%, then you will have the IRR.

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