Hi Sir, I know how to calculate NPV and IRR % but I got some tricky question in the exam. I would like to ask about my previous some exam question which I was failed. (Not exactly but some I still remember) Given net cash flow $9500 for 5 years ,cost of capital 12% Q1@ ask me to find investment if NPV $20000 (this amount not sure may be $2000 ) Q2@ ask me to find investment amount if IRR 18%… Can you help me how to calculate?

In future, please ask this kind of question in the Ask the Tutor Forum, and not as a comment on a lecture.

For the first question, you first discount the 9,500 cash flows by multiplying by the 5 year annuity discount factor at 12%. You then subtract 20,000 and this tells you what the initial investment will be.

For the second question, the IRR is the interest rate at which the NPV equals zero. So discount the 9,500 cash flows by multiplying by the 5 year annuity factor at 18%. The initial investment must equal the present value of the cash flows that you have just calculated.

Great lecture! But I am a bit confused.. For the NPV, why are we applying the discount factor to the cash generated amount and not to the 80,000? For example, if we had borrowed 80,000 for the project at 10% rate, at the end of the 4 years period we would have paid in total (including interest) 117,128 and earned 110,000 (cash generated + scrap value of project), which would let us with a 7,128 cash deficit. I don’t understand that approach :/, is there any tip to help me to see what I am missing? Thanks a mil!!

It would. seem that you have not watched the previous lectures on interest and on discounting, because I do explain in these lectures what is happening with discounting and why.

(The reason you would not end up with your cash deficit is because when you receive the money each year you will be using to pay back some of the borrowing and so the interest will be a lot lower.)

Can you please explain how you got the discount factors, i have looked up the previous lectures and still can’t relate how you got 0.909 as a discount factor for 20000.. Please help!

i got lost getting to the IRR=13.78,from the lecture,it says IRR = 10% + (6660/8820 X 5%) = 10% + 3.78% ?????? I get totally different answers…..off the grid,please help!!

Able ltd is considering a new project for which the following information is available:

Initial cost – $300,000 Expected life – 5 years Estimated scrap value – $20,000 Additional revenue from the project – $120,000 per year Incremental cost of the project – $30,000 per year Cost of capital – 10% A) calculate the Net present Value of the project (to the nearest $)

Please answer this for me as i am bit confused about how to deal with incremental costs.

You must ask this kind of question in the Ask the Tutor Forum and not as a comment on a lecture. The word incremental means extra – so incremental costs are extra costs.

hi sir, how solve this question? Using an interest rate of 10% per year the net present value (NPV) of a project has been correctly calculated as $50. If the interest rate is increased by 1% the NPV of the project falls by $20.

What is the internal rate of return of the project?

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cynthiamyint says

Hi Sir,

I know how to calculate NPV and IRR % but I got some tricky question in the exam.

I would like to ask about my previous some exam question which I was failed.

(Not exactly but some I still remember)

Given net cash flow $9500 for 5 years ,cost of capital 12%

Q1@ ask me to find investment if NPV $20000 (this amount not sure may be $2000 )

Q2@ ask me to find investment amount if IRR 18%…

Can you help me how to calculate?

Thanks,

Cynthia

John Moffat says

In future, please ask this kind of question in the Ask the Tutor Forum, and not as a comment on a lecture.

For the first question, you first discount the 9,500 cash flows by multiplying by the 5 year annuity discount factor at 12%.

You then subtract 20,000 and this tells you what the initial investment will be.

For the second question, the IRR is the interest rate at which the NPV equals zero. So discount the 9,500 cash flows by multiplying by the 5 year annuity factor at 18%. The initial investment must equal the present value of the cash flows that you have just calculated.

elainew says

Great lecture! But I am a bit confused.. For the NPV, why are we applying the discount factor to the cash generated amount and not to the 80,000? For example, if we had borrowed 80,000 for the project at 10% rate, at the end of the 4 years period we would have paid in total (including interest) 117,128 and earned 110,000 (cash generated + scrap value of project), which would let us with a 7,128 cash deficit. I don’t understand that approach :/, is there any tip to help me to see what I am missing? Thanks a mil!!

John Moffat says

It would. seem that you have not watched the previous lectures on interest and on discounting, because I do explain in these lectures what is happening with discounting and why.

(The reason you would not end up with your cash deficit is because when you receive the money each year you will be using to pay back some of the borrowing and so the interest will be a lot lower.)

jwang8 says

classic! way better than my actual teacher.

John Moffat says

Thank you for your comment 🙂

muddyzaahid says

Good day,

Can you please explain how you got the discount factors, i have looked up the previous lectures and still can’t relate how you got 0.909 as a discount factor for 20000.. Please help!

John Moffat says

You take the present value tables, and look at the column headed up 10% and the row for 1 period.

muddyzaahid says

Thank you for the response.. Didn’t expect it to be this quick, have a great day ahead ?

sadafwaheed1 says

There is a formula also discount factor = 1/(1+r)^n

Where r is the interest 10%= 0.1

And N is the period

syedsami says

can u say how do we get the discount factor?

John Moffat says

I explain how to get the discount factors in the lectures covering the previous chapter of our notes!!!

littlegirl18 says

i got lost getting to the IRR=13.78,from the lecture,it says IRR = 10% + (6660/8820 X 5%)

= 10% + 3.78% ??????

I get totally different answers…..off the grid,please help!!

Gabriel says

i got a little lost, +6660 and -2160 is 8820? or in this step we just ignore the mathematical signs and just do regular addition?

John Moffat says

The difference between +6,660 and zero is 6,660

The difference between + 6,660 and – 2,160 is bigger and is 8,820.

This is standard arithmetic 🙂

saroj says

Able ltd is considering a new project for which the following information is available:

Initial cost – $300,000

Expected life – 5 years

Estimated scrap value – $20,000

Additional revenue from the project – $120,000 per year

Incremental cost of the project – $30,000 per year

Cost of capital – 10%

A) calculate the Net present Value of the project (to the nearest $)

Please answer this for me as i am bit confused about how to deal with incremental costs.

John Moffat says

You must ask this kind of question in the Ask the Tutor Forum and not as a comment on a lecture.

The word incremental means extra – so incremental costs are extra costs.

davthev says

hi sir, how solve this question?

Using an interest rate of 10% per year the net present value (NPV) of a project has been correctly calculated as $50. If the interest rate is increased by 1% the NPV of the project falls by $20.

What is the internal rate of return of the project?

11.7%

20.0%

7.5%

12.5%

John Moffat says

You know that the NPV at 10% is $50.

You know that the NPV at 11% (10 + 1) is $30 (50 – 20).

Now you have two ‘guesses’ and you continue as I do in the example in my free lectures.

davthev says

tqvm sir for yr quick response. May God continue to bless u

John Moffat says

You are welcome 🙂