This document summarizes a financial analysis of a potential investment project. It shows the initial investment of $1,000,000 and cash flows over 5 years. It calculates the internal rate of return (IRR) of 14% and net present value (NPV) of -$27,875 using a discount rate of 15%. The analysis finds the payback period is 3.45 years.
1. initial investment 1000000
year 0
intcremental revenue
project cost intcremental cost Variable costs
fixed costs
Total costs
Depreciation-
1000000 Gross margin
Taxes
Net Income
Depreciation+
work capital
salvage value
Net cash flow -1000000
Net investment
IRR 14%
payback period 3.45
rate 15% NPV -27875.02158
PV is Question5
fisrt we have to start with initial investment,
ten calculate the depreciation the first one is negetive and the 2nd one it is added
after the net income , we add back the depreciation
work capital is an outflow , so the increase in work capital is decrease in cash flow.
2. year1 year2 year3 year4 year5
900000 900000 900000 900000 900000
360000 360000 360000 360000 360000
140000 140000 140000 140000 140000
500000 500000 500000 500000 500000
200000 200000 200000 200000 200000
200000 200000 200000 200000 200000
60000 60000 60000 60000 60000
140000 140000 140000 140000 140000
200000 200000 200000 200000 200000
50000 50000 50000 50000 50000
290000 290000 290000 290000 290000
years
if you sell the machine after years you can add it as a salvage value,
d the 2nd one it is added
al is decrease in cash flow.
3. initial investment 1000000
construction 500000 year 0 year 1
intcremental revenue 900000
project cost intcremental cost Variable costs
fixed costs
Total costs 600000
Depreciation- 300000
net project cost 1500000 Gross margin 0
Taxes 35% 0
Net Income 0
Depreciation+ 300000
work capital
salvage value
Net cash flow -1500000 300000
Net investment
IRR 0%
payback period 5.00 years
rate 12% NPV -418567.139
Advantages
IRR can't be manipulated
cost of capital 12%
NPV is an amount therefore the
if your gross margin 0 then the tax is zero m they don’t charge u ,
if you have 2 different projects, the irr u wi
65% of business use NPV
45% of business use IRR
20% of business use payback
total 130 that means most of companies use
4. year 2 year 3 year 4 year 5
900000 900000 900000 900000
600000 600000 600000 600000
300000 300000 300000 300000
0 0 0 0
0 0 0 0
0 0 0 0
300000 300000 300000 300000
300000 300000 300000 300000
disadvantagers
n't be manipulated doesn't take into account the size of the investment
an amount therefore the size of the investment is evident
can be change, make it look better by changing the discount rate,
lower rate= higher NPV
ent projects, the irr u will get is the same.however the size of investment is different, the in come every year is different
ns most of companies use more than 1 crateria
