Question #222396

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 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**

i.) PV=120000

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+51599.10"

NPV_{1}= -6672.5

ii.) The investment should not be accepted because the NPV is a negative.

iii.) Using 12% as the discount rate

PV= 120000

1^{st}"=\\frac{25000}{1.12}=22321.42"

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

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

NPV_{2}"=-120000+22321.43+35873.72+46265.72"

= -15539.13

"IRR=R_1+\\frac{NPV_1\\times(R_2-R_1)}{{NPV_1-NPV_2}}"

IRR"=6.5" %

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