Machinery was purchased for $340,000. Freight charges amounted to $14,000 and there was a cost of $40,000 for building a foundat
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Answer:
With mitigation: NPV =$36,670,000, IRR= 15,24%
Without mitigation: NPV= $ 42,000,000, IRR= 19,86%
Explanation:
To calculate the Net Present Value (NPV) we have to sum the present value of a project´s cash flows (positive and negative cashflows). To do so, we need: the number of periods of the project, the discount rate, cost of captal or WACC, and the future values of the cash flows. Then we apply the formula attached.
To calculate the Internal Rate of Return (IRR) we have to find the discount rate, cost of capital or WACC that makes the NPV equal to cero. That means we have to find a rate in which the investor do not create or destroy value, only recovers the investment. I attached the formula.
But, this is better if we use excel:
First we copy the cash flows of the two projects. To find the NPV we use the financial formula "NPV" in this way:
"=NPV(rate;cash flows from year 1 to year 5)+ cash flow of year 0"
To find the IRR we use the financial formula "IRR" in this way:
"=IRR(cash flows from year 0 to year 5)"
I attached the excel figure.
