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    IRR and NPV

    Uploaded by

    Pankaj Kumar Jain
    The document discusses Net Present Value (NPV) and Internal Rate of Return (IRR). It provides examples of calculating NPV and IRR for single and grouped cash flows. It also shows the HP 10B calculator keystrokes for each example.

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    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    IRR and NPV

    Uploaded by

    Pankaj Kumar Jain
    168 views21 pages
    The document discusses Net Present Value (NPV) and Internal Rate of Return (IRR). It provides examples of calculating NPV and IRR for single and grouped cash flows. It also shows the HP 10B calculator keystrokes for each example.

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    © Attribution Non-Commercial (BY-NC)

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    The document discusses Net Present Value (NPV) and Internal Rate of Return (IRR). It provides examples of calculating NPV and IRR for single and grouped cash flows. It also shows the HP 10B calculator keystrokes for each example.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    168 views21 pages

    IRR and NPV

    Uploaded by

    Pankaj Kumar Jain
    The document discusses Net Present Value (NPV) and Internal Rate of Return (IRR). It provides examples of calculating NPV and IRR for single and grouped cash flows. It also shows the HP 10B calculator keystrokes for each example.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    You are on page 1of 21

    Internal Rate of Return (IRR) and Net Present Value (NPV)

    Net present value (NPV): the sum of the present values of all cash inflows minus the sum of the present values of all cash outflows. The internal rate of return (IRR): (1) the discount rate that equates the sum of the present values of all cash inflows to the sum of the present values of all cash outflows; (2) the discount rate that sets the net present value equal to zero. The internal rate of return measures the investment yield.

    IRR and NPV


    Example: Yield on a single receipt. An investor can purchase a vacant lot for $28,371 and expects IRR for to sell it for $50,000 in 5 years. What is the expected this investment?

    1 PV = FV (1 + )n d
    $28,371 = $50,000
    d = 12%

    1 (1 + ) 5 d

    IRR and NPV


    HP 10B Keystrokes
    CLEA R ALL 1 28371 50000 5 N I/YR P/Y R +/FV PV

    Clears registers One payment per year PV = -$ 28,371 FV = $ 50,000 FV in 5 years Solve for IRR

    IRR and NPV


    Example: NPV for a single receipt. An investor can purchase a vacant lot for $28,371 and expects to sell it for NPV $50,000 in 5 years. What is the expected for this investment if the investor discounts future cash flows at 15%?

    1 NPV = PV + FV n (1 + d )
    1 NPV = $28,371 + $50,000 (1 + 015) 5 .
    NPV = -$28,371 + $24,858.84 = $3,512.16

    IRR and NPV


    HP 10B Keystrokes
    CLEAR ALL 1 P/YR

    50,000 FV 15 5 PV I/YR N

    +/28,371

    Clears registers One payment per year $50,000 future value Discount rate = 15% FV in 5 years Compute present value Subtract $28,371

    IRR and NPV


    Example: Yield on an Ordinary Annuity An investor has the opportunity to invest in real estate costing $28,371 today. The investment will provide $445.66 at the end of each month for the IRR (compounded monthly) for this next 8 years. What is the (annual) investment?

    1 PV =PMT d t = (1 + )t 1 k 1 $28,371 = . 44566 d t = (1 + )t 1 12 d = .9167%; d =110% 0 . 12


    96

    nk

    IRR and NPV


    HP 10B Keystrokes

    CLEAR ALL P/YR

    12 28,371 445.66 8 I/YR

    +/PMT x P/YR

    PV

    Clears registers Monthly compounding PV = - $28,371 Monthly pmt = $445.66 96 months Compute IRR

    IRR and NPV


    Exam ple:N PV for an O rdinary A nnuity

    A n investor has the opportunity to invest in real estate costing $28,371 today. T he investm ent w ill provide $445.66 at the end each m onth for the next 8 years. W hatN P the this is Vfor investm ent if the investor discounts future cash flow s m onthly a 10% annual rate?

    1 N P V = $28,371 + 44566 . 010 t . t =1 (1 + ) 12


    N PV = - $28,371 + $29,369.66 = $998.66

    96

    IRR and NPV


    HP 10B Keystrokes
    Clears registers Monthly payments Monthly pmt = $445.66 Annual discount rate = 10% 96 monthly payments Compute PV Subtract $28,371

    C A A LE R LL P/Y R PM T

    1 2 4 5 6 4 .6 1 0 8 PV

    I/Y R

    xP R /Y

    + /2 ,3 1 8 7

    IRR and NPV

    Exam ple: W hat is IR R for an investm ent that costs $96,000 today and the pays $1028.61 at the end of the m onth for the next 60 m onths and then an additional $97,662.97 at the end of the 60th m onth?

    1 FV PV = PM T + d d nk t =1 (1 + ) t (1 + ) k k 1 $97,66297 . $96,000= $1,02861 . + d t d 60 t =1 (1 + ) (1 + ) 12 12


    60

    nk

    d/12 = 1.0921% ; d = 13.10%

    IRR and NPV


    HP 10B Keystrokes
    CLEAR ALL P/YR

    12 96,000

    +/-

    PV

    1,028.61 PMT 97,662.97 5 I/YR FV

    x P/YR

    Clears registers Monthly payments PV = -$96,000 Monthly pmt = $1,028.61 FV = $97,662.97 60 months Compute yield (IRR)

    IRR and NPV


    Example: NPV for an ordinary annuity with an addition lump sum receipt at the end of the investment term. What is the NPV for an investment that costs $96,000 today and pays $1028.61 at the end of the month for the next 60 months and then pays an additional $97,662.97 at the end of the 60th month if the investor discounts expected future cash flows monthly at the annual rate of 13.1047%?
    1 FV + d t d nk t =1 (1 + ) (1 + ) k k 60 1 $97,662.97 NPV = $96,000 + $1,028.61 + 0131047 t . 0131047 60 . t =1 (1 + ) (1 + ) 12 12 NPV = PV + PMT
    nk

    NPV = - $ 96,000 + $ 96,000 = $ 0

    IRR and NPV


    HP 10B Keystrokes
    Clears registers Monthly payments Monthly pmt = $1,028.61 FV = $97,662.97 60 months of payments Discount rate = 13.1047% Compute PV Subtract $96,000

    CLEAR ALL 12 1,028.61 97,662.97 5 P/YR PMT FV x P/YR I/YR

    13.1047 PV

    +/96,000

    IRR and NPV


    Example: IRR for uneven cash flows. What is the IRR for an investment that costs $100,000 today and pays $20,000 one year from today; $35,000 two years from today; and $75,000 three years from today?

    $20,000 $35,000 $75,000 $100,000 = + + 2 (1 + d ) (1 + d ) (1 + d )3 d =1159% .

    IRR and NPV


    HP 10B Keystokes

    CLEAR ALL 1 100,000 20,000 35,000 75,000 P/YR

    +/CFj CFj CFj

    CFj

    IRR/YR

    Clears registers One payment per year Initial CF = - $100,000 1st CF = $ 20,000 2nd CF = $ 35,000 3rd CF = $ 75,000 Compute yield (IRR)

    IRR and NPV


    Example: NPV for uneven cash flows. What is the NPV for an investment that costs $10,000 today, $8,000 one year from today, $5,000 two years from today and pays $15,000 three years from today and $25,000 four years from today if future cash flows are discounted at 10%?

    $8,000 $5,000 $15,000 $25,000 NPV = $10,000 + + 2 3 11 . 11 . 11 . 114 .


    NPV = -$10,000 - $7,272.73 - $4,132.23 + $11,269.72 + $17,075.34 = $ 6,940.10

    IRR and NPV


    HP 10B Keystrokes
    CLEAR ALL 1 10,000 8,000 P/YR

    + /+ /+ /CFj CFj

    CFj CFj CFj

    5,000 15,000 25,000 10

    I/YR N PV

    Clear registers One payment per year Initial CF = - $ 10,000 1st CF = - $ 8,000 2nd CF = - $ 5,000 3rd CF = $ 15,000 4th CF = $ 25,000 Discount rate = 10% Compute net present value

    IRR and NPV


    Exam ple:IRR for grouped cash flows.

    IRR for an investm ent that costs $92,725.60 Com pute the today and is expected to pay $10,000 at the end of the year f the next three years; $15,000 at the end of years 4 and 5; and $100,000 at the end of year 6.
    $10,000 5 $15,000 $100,000 $92,72560 = . + + t t (1 + d ) t = 4 (1 + d ) (1 + d )6 t =1
    d = 12%
    3

    IRR and NPV


    HP 10B Keystrokes
    CLEAR ALL 1 P/YR

    92,725.60 10,000 3 15,000 2 100,000

    +/-

    CFj

    CFj Nj CFj Nj CFj IRR/YR

    Clears registers One payment per year Initial CF = - $ 92,725.60 1st grouped CF = $ 10,000 Occurs three times 2nd grouped CF = $ 15,000 Occurs twice 3rd CF = $ 100,000 (once) Compute the yield (IRR)

    IRR and NPV


    Example: NPV for grouped cash flows. NPV for an investment that costs $98,000 today and is Compute the expected to pay $791.38 at the end of each month for 12 months; $850.73 the end of each month for the following 12 months; $914.54 at the end of each month for the following 11 months and a balloon payment of $107,491.18 at the end of month 36 if the investor discounts future cash flows monthly at a 13% annual rate.

    NPV = - $554.17 = - $98,000 +


    24 35 1 1 1 $107,49118 . $79138 . + $850.73 + $914.54 + 013 t . 013 t . 013 t . 013 36 . t = 1 (1 + t = 13 (1 + t = 25 (1 + ) ) ) (1 + ) 12 12 12 12 12

    IRR and NPV


    HP 10B Keystrokes
    CE R L L A AL 1 2 9, 0 8 0 0 71 8 9. 3 1 2 80 3 5. 7 1 2 94 4 1. 5 1 1 17 9 . 8 0, 1 4 1 1 3 IY /R NV P PY /R

    + / Cj F N j Cj F N j Cj F N j

    Cj F

    Cj F

    Clear registers Monthly payments Initial CF = - $98,000 1st grouped CF = $791.38 Occurs 12 times 2nd grouped CF = $850.73 Occurs 12 times 3rd grouped CF = $914.54 Occurs 11 times 4th CF = $107,491.18 (once) Discount rate = 13% Compute net present value

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