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the below working to asked one of the question – what is the IRR %? how to define whether my working is correct :
non discounted payback – NPV 130,000 positive
discounted payback – NPV 21,110 positive ( cost of capital 12%)my working : 130,000 / 21,110 = 6.1582 + 12 %= 18.1582 whether is correct ?
because answer is 18%I am sorry but either you have copied the question wrong, or the question in whatever book you found it is nonsense.
The payback period is measured in years – a payback period cannot possibly be a NPV.
The question did asked what is the payback period and discounted payback period:
My working
Payback
Cost 270,000
Year 1 50,000
Year 2 180,000
Year 3 100,000
Year 4 50,000
Year 4 scrap value 20,000
130,000 positiveNon payback period ( costs of capital 12% pa )
Cost 270,000
Year 1 44650
Year 2 143460
Year 3 71200
Year 4 31800
21110 positivePlease advice asking another question : what is the internal rate of return to the nearest % ?
the answer is 18% , please explain .The 130,000 and the 21,110 are the net present values at 0% (when no discounting) and at 12%.
They are NOT the payback periods – the payback period is always measured in years as I wrote before.The NPV of 21,110 is not correct – you have forgotten to discount the scrap of 20,000 by 4 years. The correct NPV is 33,830
To calculate the IRR you need to guess at a rate higher than 12% – any rate, but I would try 20%. Then you approximate between the two rates in the way that I do in the lecture.
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