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NPV/IRR OF AN ACCOUNTANCY DEGREE

  • 15-01-2013 1:31pm
    #1
    psalbmb
    Registered Users Posts: 195 ✭✭


    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%.


Comments

  • #2
    SBWife
    Registered Users, Registered Users 2 Posts: 1,287 ✭✭✭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.


  • #3
    psalbmb
    Registered Users Posts: 195 ✭✭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?


  • #4
    ElektroToad
    Registered Users, Registered Users 2 Posts: 101 ✭✭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...


  • #5
    Itchianus
    Registered Users, Registered Users 2 Posts: 230 ✭✭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... :o


  • #6
    Alan Shore
    Registered Users, Registered Users 2 Posts: 735 ✭✭✭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... :o

    + 1


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  • #7
    psalbmb
    Registered Users Posts: 195 ✭✭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 :(


  • #8
    Helpneeded86
    Registered Users, Registered Users 2 Posts: 523 ✭✭✭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

    1601804-exhibit12b-1.jpg

    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?


  • #9
    SBWife
    Registered Users, Registered Users 2 Posts: 1,287 ✭✭✭SBWife


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

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


  • #10
    Helpneeded86
    Registered Users, Registered Users 2 Posts: 523 ✭✭✭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.


  • #11
    shuyin1
    Registered Users, Registered Users 2 Posts: 369 ✭✭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.


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  • #12
    Helpneeded86
    Registered Users, Registered Users 2 Posts: 523 ✭✭✭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.


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