The Initial Outlay and Internal Rate of Return of a Geography Name Professor Course Institution Date Exercises 1

Geography
Name
Professor
Course
Institution
Date

Exercises
1. The firm has initial outlay of $ 20,000.The inflows expected is $ 5,000 per year in 5 years. The
income tax rate is 40%.The capital is 12 percent
a. The IRR and NPV
The net present value and the internal rate of return help the company to evaluate whether a
project or an investment is worth enough.
The NPV
The net present value refers to a potential change in investor’s wealth that is normally caused by
an investment or project while the time value of money is accounted for.
The NPV formulae are;
NPV=R* [(1-(1+i)-n] / i - initial investment
Description of the terms
R =is the cash inflow received at each period
i =is the rate of return anticipated by the investment
n =the number of periods during which the investment is anticipating
Solution
Initial investment =$20,000
Tax=40%

R = $5,000
i= 12%
n=5 years
Cash inflow R
($)
Time in
years
The NPV rate 1/(1+i)n Present value ($)
R*1/(1+i)n
After tax ($)
(40%)
20,000 0 1/(1+0.12)0=1.000 -20,000 -
5,000 1 1/(1+0.12)1=0.8928 =4,464 =1,785
5,000 2 1/(1+0.12)2=0.7972 =3,985 =1,594
5,000 3 1/(1+0.12)3=o.7118 =3,559 =1,424
5,000 4 1/(1+0.12)4=0.6355 =3,178 =1,271
5,000 5 1/(1+0.12)5=0.5674 =2,837 =1,135
Total =18,023 Total =7,209
Therefore, the NPV is;
The total cash inflows is = $ 18,023.
The total cash inflow after tax is =$ 18,023-$7,209
= $ 10,814
Therefore the NPV =Total cash inflow –the initial investment
=$10,814-$ 20,000
= $ -9,186

The IRR
Internal rate of return is interest at which the total net present value of the project or investment
is equal to zero (Schläfke, Silvi & Möller, 2012). Therefore, it shows that IRR is used in
evaluation of investment or a project. For example, if a certain IRR of the project exceeds the
anticipated rate of return then that investment is known to be desirable thus the best. Also, when
the IRR is not reaching the planned IRR rate then project is totally rejected.
Generally, IRR assists
Solution
The IRR formula;
0 = P0 + P1/(1+IRR) + P2/(1+IRR)2 + P3/(1+IRR)3 + . . . +Pn/(1+IRR)n
The P0, P1,,,,,,,, Pn are the expected inflows in respective periods and 1,2,n are IRR equals
expected by the project.
In the question;
Initial investment =$20,000
Tax=40%
R = $5,000
i= 12%
n=5 years