101 Concepts for the Level I Exam

The **NPV** of an investment is the present value of its cash inflows minus the present value of its cash outflows. The NPV of a project is calculated as:

Consider a project which requires an initial investment of $10,000. It is expected to generate $5,000 in the first year, $6,000 in the second year and $7,000 in the third year. The cost of capital for this project is 10%. Calculate the NPV of this project.

__Solution__**:**

Using the financial calculator: CF0 = -10,000; CF1 = 5,000; CF2 = 6,000; CF3 = 7,000; I = 10. CPT NPV = 4,763.33

The **IRR** is the discount rate the makes the NPV equal to zero. i.e. it equates the PV of the cash inflows to the PV of the cash outflows. The IRR of a project is calculated as:

Consider a project which requires an initial investment of $10,000. It is expected to generate $5,000 in the first year, $6,000 in the second year and $7,000 in the third year. Calculate the IRR of this project.

__Solution__**:**

Using the financial calculator: CF0 = -10,000; CF1 = 5,000; CF2 = 6,000; CF3 = 7,000; I = 10; CPT IRR = 33.87

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