NPV/IRR OF AN ACCOUNTANCY DEGREE

psalbmb

Please Move if this topic is in the wrong thread.

So my Finals are coming ever so closer and Im really confused on a section of the course, which is Project Management. now the reason i've put this post in the accountancy thread is because half of my course do accountancy and the lecturer ran through this topic as the accountancy course have covered this before and was wondering would anyone be able to help me understand it please, this question (below) is just a sample question from a past exam paper as an example. any help would be great.

the question...
1. Calculate the Net Present Value (NPV) for a project based on the following financial data.
Assume the estimated costs and benefits for this project are spread over four years as follows:
􀂃 Estimated costs are €200,000 in year 1, €100,000 in year 2, and €25,000 each in year 3
and year 4
􀂃 Estimated benefits are €50,000 in year 1, €100,000 in year 2, €200,000 in year 3, and
€250,000 in year 4
􀂃 The discount rate is 10%.

SBWife

Subtract the negative cash flows in each year from the positive cash flows in that year.

Using discount factor tables discount all net cash flows back to the present using the 10% rate. Normally you'll assume the cash flows occur either at the beginning of or end of the year if this is not stated in the question.

Add the discounted cash flows for each year and you'll get your NPV.

psalbmb

SBWife wrote: »

Subtract the negative cash flows in each year from the positive cash flows in that year.

Using discount factor tables discount all net cash flows back to the present using the 10% rate. Normally you'll assume the cash flows occur either at the beginning of or end of the year if this is not stated in the question.

Add the discounted cash flows for each year and you'll get your NPV.

Errmm ...ok ! lol I haven't a clue what any of that means lol. the question will be
a) Calculate the NPV of each project?
b)calculate the IRR of each project?
c) recommend, with reasons, which project you would undertake?
d) explain the inconsistency in ranking of the two projects between NPV & IRR?

ElektroToad

OP do you know what discount factor tables are and are you familiar with how to use them? It not then yeah your not gonna have a clue what's going on...

It's basically as SBWife said:

Step 1: calculate the net cash flows for each year (for example in your question for Year 1 -150 000; Year 2 0; Year 3 175 000; Year 4 225 000)
Step 2: discount the net cash flows for each year using the factor tables (in your example you use 10% as the discount rate)
Step 3: Add up your discounted cash flows to get your NPV value

IRR is a bit more involved. Prob best to look at a textbook or maybe online for that one. You basically need to calculate a 2nd NPV value for these cash flows by using a different discount rate (of your choice i assume) and then using a formula to calculate the IRR (which is given as a percentage).

Hope this helps...

Itchianus

Talk about a misleading thread title! Here was me expecting to see an interesting discussion about the NPV / IRR of doing an degree in accountancy...

Alan Shore

Itchianus wrote: »

Talk about a misleading thread title! Here was me expecting to see an interesting discussion about the NPV / IRR of doing an degree in accountancy...

+ 1

psalbmb

Alan Shore wrote: »

+ 1

Sorry Guys, didn't mean to mislead you both. Its just my exam is acoming, and I needed to get this thread attention ASAP lol,

sorry again

Helpneeded86

the question...
1. Calculate the Net Present Value (NPV) for a project based on the following financial data.
Assume the estimated costs and benefits for this project are spread over four years as follows:
�� Estimated costs are €200,000 in year 1, €100,000 in year 2, and €25,000 each in year 3
and year 4
�� Estimated benefits are €50,000 in year 1, €100,000 in year 2, €200,000 in year 3, and
€250,000 in year 4
�� The discount rate is 10%.

Adjust cash Flows

Year 1 - (150k)
Year 2 - (0)
Year 3 - 175k
Year 4 - 225k



Calculate NPV

Year 1 - (150k)*0.909 = (136,350)
Year 2 - (0)*0.826 = 0
Year 3 - 175k*0.751 = 131,425
Year 4 - 225k*0.683 = 153,675

285,100 = NPV


Anyone confirm Im correct?

SBWife

You have the concept down but year 1 is a negative cash flow.

(136,350)
0
131,425
153,675

Helpneeded86

SBWife wrote: »

You have the concept down but year 1 is a negative cash flow.

(136,350)
0
131,425
153,675

Sorry ya miscalculated that. I adjusted it above.

The IRR consists of 4 items

A - 10%
B - 14% or any %
a - 285,100
b - Is it NPV with a 14% or any % that corresponds with B?

The there is a formula i cant recall off hand but its like A + a/b-a + B.

shuyin1

Helpneeded86 wrote: »

Sorry ya miscalculated that. I adjusted it above.

The IRR consists of 4 items

A - 10%
B - 14% or any %
a - 285,100
b - Is it NPV with a 14% or any % that corresponds with B?

The there is a formula i cant recall off hand but its like A + a/b-a + B.

Using your figures (136,350)+131,425+153,675 npv@10%=148,750. Irr works best the closer you the two npv to 0. a is a positive npv, b is negative npv. Formula is A+(npva*(B-A)/npva-npvb). The cash flows provided seems wrong but lets go with it. I used 40% for a to get npv of 15.2 and 50% for b npv (3.7). Stick it into formula 40+(15.2*10/18.9)=48% irr.

Helpneeded86

shuyin1 wrote: »

Using your figures (136,350)+131,425+153,675 npv@10%=148,750. Irr works best the closer you the two npv to 0. a is a positive npv, b is negative npv. Formula is A+(npva*(B-A)/npva-npvb). The cash flows provided seems wrong but lets go with it. I used 40% for a to get npv of 15.2 and 50% for b npv (3.7). Stick it into formula 40+(15.2*10/18.9)=48% irr.

Sorry I adjusted my figures wrong it was late last night.

OP should be aware that this is very basic NPV calculations. If you struggle at this i worry for you. Id be confident i could teach a 12 year old this in a half hour.

The NPV i have dealt with involves us calculating Capital allowances - Adjust Cash flows and Calculate tax and then work out the NPV and IRR.