Fundamentals of Finance Assignment

Running head: FUNDAMENTALS OF FINANCE
Fundamentals of finance
Name of the student
Name of the university
Author note

1FUNDAMENTALS OF FINANCE
Table of Contents
Part 3..........................................................................................................................................2
(a) Net present value.........................................................................................................2
(b) Internal rate of return...................................................................................................2
(c) Payback period............................................................................................................3
(d) Method selection for project evaluation......................................................................3
(e) Project to be proceed or not.........................................................................................4
Reference....................................................................................................................................5

2FUNDAMENTALS OF FINANCE
Part 3
(a) Net present value
Calculation of Net present value
Particulars Year 0 Year 1 Year 2 Year 3 Year 4
Cost of the equipment $ (20,000.00)
Depreciation $ (5,000.00) $ (5,000.00) $ (5,000.00) $ (5,000.00)
Increase in revenue $ 14,100.00 $ 13,395.00 $ 12,725.25 $ 12,088.99
Operating cost $ (2,300.00) $ (2,300.00) $ (2,300.00) $ (2,300.00)
Maintenance cost $ (1,000.00) $ (1,300.00) $ (1,600.00) $ (1,900.00)
Additional working capital $ (1,800.00)
Loss of opportunity cost $ (1,100.00) $ (1,100.00) $ (1,100.00) $ (1,100.00)
Cost of feasibility study $ (6,000.00)
Recovery of working capital $ 1,800.00
Salvage value of machine $ 2,900.00
Cash inflow/(outflow) $ (27,800.00) $ 4,700.00 $ 3,695.00 $ 2,725.25 $ 6,488.99
Discounting factor @ 11.8% 1 0.894 0.8 0.716 0.64
Present value -27,800 4,202 2,956 1,951 4,153
Net present value -14,538
As the management indicated that the maximum payback period acceptable is 4 years,
and it is identified that the project is not able to get the positive NPV in 4 years, the project is
not acceptable (Vernimmen et al. 2017).
(b) Internal rate of return
IRR = P0 + P1 / (1+IRR) + P2 / (1+IRR)2 + P3 / (1+IRR)3 + P4 / (1 +IRR)4
Where, P0 to P4 represents the cash flow in year 0 to Year 4 and IRR represents the internal
rate of return.
Through the trial and error method, the IRR = -24.25%