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Math Help - NPV and IRR

  1. #1
    Junior Member
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    Question NPV and IRR

    Am I allowed to open up several threads in one day when the other threads i opened have not been answered? because i have many topics I am stuck on, so I cant combine it into one? since they are all different topics.

    However, if I am not allowed, this thread can be deleted, until someone else have helped me in other threads?

    Its about NPV and IRR.

    What is the formula for it in a calculator? I have looked in many websites, but it doesn't explain itself clear enough.

    The formula can be used to work these out?

    1. A company is considering whether to spend 1100 on equipment. It is expected that profits from the project will be 1000 after one year, and 100 after each of the second and third years.
    Management are only interested in projects yielding at least 9% per annum.
    What is the Net Present Value of this investment (to the nearest pound)? (NPV answer)


    2. An investment has an NPV of 4000 at 9% and an NPV of 1000 at 12%. What is the Internal Rate of Return? (IRR answer)

    Thanks if anyone can help! muchly appreciated.
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  2. #2
    MHF Contributor
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    You must be looking in the wrong places.

    NPV is merely the present value of spme sequence of future payments. Why is that dark? It is easy enough when the payments are level or increasing by some predictable amount. When payments vary all over the place, there is a formula for each arrangement and none can be written succintly.

    IRR is merely the level rate of return that brings some sequence of future payments to a given present value. Only in VERY SPECIFIC circumstances can there be a nice, closed formula for such a thing. Indeed, if you go over four cash flows, you really connot expect to find a formula, per se.

    Where does that leave us? "Basic Principles".

    In your example:

    [quote]1. A company is considering whether to spend 1100 on equipment. It is expected that profits from the project will be 1000 after one year, and 100 after each of the second and third years.
    Management are only interested in projects yielding at least 9% per annum.
    What is the Net Present Value of this investment (to the nearest pound)? (NPV answer)]/quote]

    We have given i = 0.09
    This gives v = 1/(1+i) = 1/1.09 = 0.91743119
    Then we can write: NPV = -1100 + 1000v + 100v^{2} + 100v^{3}
    That is easily solved. I get NPV = -21.18246000
    This seems to indicate that 9% is a bit too far a stretch for this investment.

    In your other example:

    4000 = Number/1.09^n
    1000 = Number/1.12^n

    This gives:

    Number = 325843.10560611775609
    n = 51.058705734532394527

    I leave it to you to read the definition of IRR and finish the solution.

    Or do we get to approximate? +3% decreased NPV by $3000 Perhaps another +1% will drop it to zero?

    What are your definitions?
    What are your tools?
    Don't take it out on your poor calculator.
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  3. #3
    Junior Member
    Joined
    Oct 2009
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    Hi, thanks there. I get the NPV and the fomula. But I don't get IRR. is there a specific formula for working out the IRR?
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