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ncastel
Feb 23, 2008, 06:23 PM
I need help figuring out this problem.
(NPV, PI, IRR Calculations) considering two independent projects, project A and project B. The initial cash outlay associated with Project A is $50,000, and Project B is $70000. The required rate of return on both projects is 12%. The expected annual free cash flows from each project are as follows:
Year Project A Project B
0 -50000 -70000
1 12000 13000
2 12000 13000
3 12000 13000
4 12000 13000
5 12000 13000
6 12000 13000
I am to calculate the NPV and the IRR Only for each project and indicate if the project should be accepted. Can someone please help me with this problem? I don't know the formulas so it is hard for me to get a start on this. Thanks

morgaine300
Feb 23, 2008, 09:37 PM
You need to be patient and wait for someone to get to your question instead of posting it twice. Not only do we not exactly have tons of people who can do this, but it's also Saturday night. :-)

PV of annuity is:

PV=Pmt\left(\frac{1-(1+i)^{-n}}i\right)

where i = interest rate per compounding period, and n = number of periods. (Since yours is annual, i is just the annual rate and n is the number of years.)

Don't let them listing the investment amounts as year 0 throw you off. The present value of something from today is itself. That is not part of your present value calculations, only the future cash flows.

NPV is the difference between the PV of your future cash flows and the initial investment. (Hence, net present value.) You're looking at how your invested amount compares with what you get out of it in the future. But since those are in the future, you have to get the present value of them first and put them on "equal footing."

I don't know IRR. I'm an accounting person, and while there are crossovers, IRR isn't one I do. So you'll have to wait for someone else on that one.