A project has an initial cost of 40000 expected net cash...

A project has an initial cost of $40,000, expected net cash inflows of $9,000 per year for 7 years, and a cost of capital of 11%. What is the project's NPV, IRR, PI, payback period, and discounted payback period?

Transcript

00:01 See, irr is the rate of return that makes npv equals to 0.

00:15 So here we can say minus 40000 plus 9000 multiplied by 1 minus 1, 1 minus 1 divide by here 1 plus 0 .1284 multiplied by 7 then divided by 0 .1284 is equals to 0.

00:44 Now we can say that irr is equals to 12 .84.

00:50 It is always recommend to use a financial calculator to calculate irr.

00:56 Trial and error method can be time consuming.

01:00 Now come to the b part.

01:01 Here we have to see the future value of cash flows and it is equals to cash flow multiplied by 1 plus r multiply n minus 1 divided by r.

01:21 So here we can say that it is equals to 9000 multiplied by 1 plus 0 .11 multiplied by 7 minus 7 sorry minus 1 here 1 will come then divided by 0 .11.

01:42 So it is equals to 9000 multiplied by 9 .783274.

01:50 So it is equals to $88049 .4671.

01:57 Now we can say that future value is equals to present value in bracket 1 plus r multiplied by n.

02:10 So here 88049 .4671 is equals to 40000 multiplied by in bracket 1 plus r and n is equals to 7.

02:24 So it is equals to here 2 .201237 is equals to 1 plus r multiplied by 7.

02:33 So it is 1 .119315 is equals to 1 plus r and r is equals to 0 .119315.

02:44 So we can say mirr is 11 .93%.

02:51 Now move to the c part.

02:54 Here we can say that profitability index is equals to present value of cash flows upon we can say divided by here initial investment.

03:20 So now here we can say it is equals to here present value of cash flows we have to see now and it is equals to annuity multiplied by 1 minus 1 divided by here we have to divide it by 1 plus r multiplied by n then divided by r.

03:52 So here we get 9000 in bracket 1 minus 1 divided by 1 plus 0 .11 multiplied by 7 and then divided by 0 .11.

04:06 So here we get it is equals to 42409 .766.

04:11 So here we can calculate profitability index and it is equals to 42409 .766 divided by 40000.

04:29 So it is equals to 1 .06.

04:32 Now come to the d part.

04:35 Here payback period is equals to 40000 divided by 9000.

04:43 So it is equals to 4 .44 years.

04:46 Now moving to the e part.

04:48 Here in the e part we can say that here we have to find what present value of year 1 cash flow.

05:04 So it is equals to 9000 divided by 1 plus 0 .11.

05:11 So it is equals to 8108 .11.

05:15 Now moving to the second one present value of year 2 cash flow.