Understanding internal rate of return

A one period investment requires an outlay of 100 today and will generate $120 a year later. The required rate of return for the investment is 10%.

What is the NPV for the investment?

What is the internal rate of return for the investment?

Comments on the difference between the required rate of return and internal rate of return?

1	year	cash flow
	0	??
	1	??
	Discount rate	??
a	npv	??
b	IRR	??
c	comment	??

Capital budgeting

An investment requires an outlay of $100,000 today. Cash inflow from the investment are expected to be $40,000 per year at the end of year 4, 5, 6, 7, and 8. You require a 20% rate of return on this type of investment. Answer the following questions:

First draw the time line and specify the cash outflow and inflow for each period.

Calculate the net present value.

Calculate the Internal rate of return of this investment.

Calculate the payback periods

Shall the investment be undertaken?

a	Discount rate	??
	year	cash flow
	0	??
	1	??
	2	??
	3	??
	4	??
	5	??
	6	??
	7	??
	8	??
b	npv	??
c	IRR	??
d	payback perioe	??
e	yes or no?	why?

Capital budgeting decision on new branch

Initial cost of building and equipment is $1 million

Expected to have a useful life of 20 years

At the end of the project the building and its equipment are expected to be sold for a $200,000 salvage value

The building and its equipment will be depreciated over their 20-year life using straight-line depreciation to a zero balance

The building is to be constructed on land leased for $22,000 per year

Net working capital must be increased by $100,000

Annual revenues from the new branch will be $400,000

Of this $400,000 in revenues, $50,000 will be drawn away from the banks main office

The new branch will incur about $130,000 per year in other expenses

Both expenses and revenues are expected to remain approximately constant over the branchs 20-year life

Marginal tax rate is 40%

Cost of capital 9%

Answer the following questions:

What is the cash flow for the branchs 20-year life

Calculate the NPV, Profitability index, and Internal rate of return (IRR).

Should the project be accepted? Why?

	discount rate	??
net investment				year	cash flow
	Net investment	??		0	??
	Plus: chg in nwc	??		1	??
	net Investment	??		2	??
				3	??
	salvage value	??		4	??
	depr	??		5	??
				6	??
Net cash flow				7	??
	revenue	??		8	??
	less: draw by bank	??		9	??
	less:lease	??		10	??
	less: oper cost	??		11	??
	less: depr	??		12	??
	earning before tax	??		13	??
	less tax	??		14	??
	earning after tax	??		15	??
	plus: depr	??		16	??
	net cash flow	??		17	??
				18	??
project cash flow				19	??
	net investment	??		20	??
	net cash flow	??
	year 1-19	??
				NPV	??
	year 20
	cash flow	??		profitability index	??
	from salvage sale	??
	from net working capital	??		IRR	??
	less: tax of salvage	??
	total	??		yes / no	??