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#1 2017-04-01 21:08:01

KellyK
Guest

Calculating IRR and NPV

Hi Guys!

Could you help me with solving a homework please.
I need to calculate IRR and NPV and struggle with understanding the  task, what I have been given and what I need to do.

A company sells Volkswagen-s is planning to sign a 5-year contract for selling Audi A4-s.
The Audis will be purchased with a price of 26 000 dollars.
It is estimated that 50 Audis can be sold for 30 000 dollars per car.
When signing the contract, the company will have to invest into 20 spare cars.
When the contract ends, the money that was spent for spare cars will be released again

Additionally 2 salesmen will be hired whose salary expenses will be 28 000 dollars per year + 4% of the income from sales that they make.
In order to prepare the showroom, 250 000 dollars will need to be invested. When the contract ends, the investments made into the show room could be sold for 50 000 dollars.

The estimated rate of return from for these investments is 12%.

Thanks in advance!

#2 2017-04-01 21:24:19

Bob
Administrator
Registered: 2010-06-20
Posts: 10,053

Re: Calculating IRR and NPV

hi KellyK

Welcome to the forum.

People from all over the world log in to this forum.  Mostly we use English.  And there's a huge variety of mathematical topics.  You have used abbreviations IRR and NPV.  In your other post you used MIRR.

There's a good chance that we don't know what these are.  Please avoid abbreviations for specialist terms or at least say what they are when you first type them.

Bob


Children are not defined by school ...........The Fonz
You cannot teach a man anything;  you can only help him find it within himself..........Galileo Galilei
Sometimes I deliberately make mistakes, just to test you!  …………….Bob smile

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#3 2017-04-01 21:38:44

KellyK
Member
Registered: 2017-04-01
Posts: 4

Re: Calculating IRR and NPV

Hi!

Thank you for informing.
For some how I thought this abbreviations are universal, so I thought I don't need to explain those. I shall correct my posts.

IRR- Internal Rate of Return
MIRR - Modified Internal Rate of Return
NPV- Net Present Value

Thanks!

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#4 2017-04-01 21:40:34

KellyK
Member
Registered: 2017-04-01
Posts: 4

Re: Calculating IRR and NPV

For Clarification:

IRR- Internal Rate of Return
NPV- Net Present Value

Thanks!

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#5 2017-04-02 00:07:41

Bob
Administrator
Registered: 2010-06-20
Posts: 10,053

Re: Calculating IRR and NPV

hi KellyK,

Thanks for the explanations.  I have not studied economics so please bear that in mind in deciding whether any of what I say is correct smile

I looked up the formula here http://www.investopedia.com/terms/i/irr.asp  and that makes some sense for me.

If you had some money to invest, you might just put it into a savings account with a known rate of interest and watch your money grow.  If a business is considering making a product they will want to know what is the equivalent rate of interest that the investment is earning.  So how would you calculate that?

You need to know how much you initially invest, that's Co in the formula; and also how much 'income' you are getting each year.  This is Ct in the formula, and is determined by subtracting all the costs from the sales during each year.  In your problem you'll have to calculate this for one car (including the amount given as a sales person bonus) and then multiply by the number of cars sold.

With an investment account with a percentage rate converted to a decimal of r (eg. 5% = 0.05) then the number 1+r is a multiplier that works out the amount in the account after one year.  eg.  If $ 500 is invested at 5% then after a year the investment is worth 500 x (1+0.05) = $ 525

In the NPV formula dividing by the 1+r term enables you to see what the business return is, stripped of any investment growth rate.  By setting NPV to zero and solving for r , you get the equivalent rate of return for the investment.  If you can get a better rate by investing the money elsewhere then it's a poor business plan.

So first you calculate NPV using 12%, then you set NPV to zero and work backwards to find the IRR value of r.  If the costs varied with each year (in real situations they probably would) then this task would be hard, but as the various figures are meant to be the same for each year, the calculation is not so bad.

If that has been any help at all, then I suggest you have a go and post back your working for each stage so I can comment.

Bob   

ps.  The 20 spare cars is a bit of a puzzle.  At the end you 'release' them.  If that means you get the cost back then you can ignore them in the calculation.


Children are not defined by school ...........The Fonz
You cannot teach a man anything;  you can only help him find it within himself..........Galileo Galilei
Sometimes I deliberately make mistakes, just to test you!  …………….Bob smile

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