Need help in Present Value and Investment Appraisal problem

[misslady]

MTG is considering replacing part of its computer network with the latest equipment. The relevant costs of the project and the corresponding savings are given below.

Year = 0
Net cash flow ($) = -100,000

Year = 1
Net cash flow ($) = 20,000

Year = 2
Net cash flow ($)= 30,000

Year = 3
Net cash flow ($) = 40,000

Year = 4
Net cash flow ($) = 50,000

Year = 5
Net cash flow ($) = 20,000

If the current cost of interest in 12% per annum on projects of this type. Calculate the net present value of the project and comment on the course of action to be taken.
Obtain also the NPV for a cost of interest of 20% and thus estimate the Internal Rate of Return.

I seriously do not know how to do this...Please help me....

 

[tkhunny]

Re: Need help in Present Value and Investment Appraisal prob

Reality Therapy: This is a very, very simple problem in NPV. If you honestly cannot do this one, you simply must rethink whether you should be in this class.

Having said that, discount as given.

i = 12
v = 1/(1+i)

((((20000v+50000)v+40000)v+30000)v+20000)v - 100000

There are more convenient ways to write it, but this may be the most instructive. Start with the inner-most parentheses and just watch the cashflows being discounted one year and joining the cash flow already on that year.

 

[misslady]

Re: Need help in Present Value and Investment Appraisal prob

I'm not taking Business Mathematics study. I'm an IT student and the school required me to take additional lesson which a 1 whole day class of teaching then off i go to complete the assignment.

 

[Denis]

Re: Need help in Present Value and Investment Appraisal prob

YEAR  INTEREST     BALANCE      DEPOSIT    INTEREST     BALANCE
  0              113,368.61                                  .00
  1  13,604.23   126,972.84    20,000.00        .00    20,000.00
  2  15,236.74   142,209.58    30,000.00   2,400.00    52,400.00
  3  17,065.15   159,274.73    40,000.00   6,288.00    98,688.00
  4  19,112.97   178,387.70    50,000.00  11,842.56   160,530.56
  5  21,406.53   199,794.23    20,000.00  19,263.67   199,794.23

Above indicates how the present value and the cash flows end up EQUAL as future values.
If you cannot follow that, then I agree with TKHunny that you are nor ready for this:
not your fault, of course, but your teacher's :idea:

 

[tkhunny]

Re: Need help in Present Value and Investment Appraisal prob

I'm not taking Business Mathematics study. I'm an IT student and the school required me to take additional lesson which a 1 whole day class of teaching then off i go to complete the assignment.

Been there. Done that. Good luck to you. I did give you a rational algorithm for the calculation. Denis demonstrated a full collection of intermediate values.

 

[misslady]

Re: Need help in Present Value and Investment Appraisal prob

Thank you so much !!!