Question #222390

As investment with a 3year life and a cost of #120000 generates revenue of #25000 in year 1 #45000 in year 2 and #65000 in year 3. If the discount rate is 8%

(i) what is the NPV of the investment.

(ii) state whether the investment should be accepted or not and why.

(iii) using 12% as your second discount rate, to solve the remaining part of the question under IRR.

Expert's answer

**Solution**

"YEAR_ 1= \\frac{25000}{1.08}=23148.14"

"YEAR _2=\\frac{45000}{1.08^2}=38580.25"

"YEAR_ 3=\\frac{65000}{1.08^3}=51599.10"

"NPV= -120000+23148.15+38580.25+51599.1"

NPV1= -6672.5

Ii.) Negative NPV, investment should not be accepted

12% discount

PV= 120000

"YEAR_1=\\frac{25000}{1.12}=22321.42"

"YEAR_2=\\frac{45000}{1.12^2}=35873.72"

"YEAR_3=\\frac{65000}{1.12^3}=46265.72"

"NPV_2=\u2212120000+22321.43+35873.72+46265.72\n\n= -15539.13"

t=3

"IRR=\\sum\\frac{C_t}{(1+r)^t}-C_o"

t=1

t= number of years

Co = initial investments

t= Number or periods

r= Discount rate

"IRR= 6.469" %

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