project appraisal — OpenTuition Forums

VVipin13y ago

kaplan text , ch 16, tyu 5.
they find IRR and NPV. the steps they use i didnt understand.
IRR=(1250-1000)/1000=25%
above step we usually do to find the percentage of increase.
NPV=-1000+1250/1.204

John MoffatTutor13y ago#1

Because the project only lasts one year, we can calculate the IRR precisely.

If the interest rate was r, then the present value of 1250 in 1 year is 1250 / (1+r).
For IRR, this must be equal to the initial cost of 1000.

So.....1250 / (1+r) = 1000

If you re-arrange you get r = 0.25, or 25%.

I don't know what you are meaning in the last line of your question.

VVipin13y ago#2

they have calculated NPV=-1000+1250/1.204, i didnt understand that.

John MoffatTutor13y ago#3

SInce the cost of capital is 20.4% (from part (a)), the alternative is simply to calculate the NPV of the project discounting at 20.4%.

The discount factor for one year at 20.4% is 1/1.204.
So the present value of 1250 in 1 year is 1250/1.204.
The initial investment is 1000
So the NPV is 1250/1.204 - 1000