Answer:
NPV: $180,285.49
IRR: 21.336%
simple rate of return: 72.13%
Explanation:
6,100,000 investment
contribution margin 3,000,000
fixed expense: <u> 900,000 </u>
EBITA 2,100,000
We will calculate the NPV without the depreciation, as the depreciation is the distribution of the investment cost over the project life.
If we include the depreciation we will be counting the investment amount twice. Entirely at Time 0 and then subtracting on each cash inflow.
We will calculate the NPV at 20% as is the company's discount rate. Even if the current division returns are in 24% as the company accepts project which yields 20%.
C 2,100,000
time 5 years
rate 20% = 20/100 = 0.2
PV $6,280,285.49
NPV = PV of cash inflow - investment
6,280,285.49 - 6,100,000 = 180,285.49
<u>the IRR:</u>
The internal rate of return is the rate at which the NPV of a priject is zero.
We calculate this using excel formula IRR
or a financial calculator
it could also be done with trial and error using the PV tables.
<u>I will explain you in Excel</u>
FIrst, you write the inflow and outflow per year:
-6,100,000
2,100,000
2,100,000
2,100,000
2,100,000
2,100,000
then we write on another cell:
=IRR(
then, select the cells
and press enter
21.336%
<u>the simple rate of return:</u>
(total return - investment) / investment
(2,100,000 x 5 - 6,100,000) / 6,100,000 =
4,400,000 / 6,100,000 = 0.721311475 = 72.13%
