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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+1250/1.204Because 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.
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
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