From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV
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Calculate NPV and IRR
From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV
Calculate NPV and IRR
- Lily company is considering purchasing a machine. Let's compute the NPV and the IRR of that machine. Here's the NPV computation. We first attach the payment, PMT of $40,000. That's the amount which is $70,000 of the annual cash revenues minus the $30,000 of the annual cash expenses. FV is $10,000, that's the future value of the extra cash inflow that Lilly will receive at the end of the five-year life of the machine. Lily company will get this by selling the used machine. Our interest rate, I is 10%. That's the annual interest rate. Now I have to pause here for a moment. I'm throwing out this 10% interest rate or discount rate or hurdle rate as if this is an easy number to get. It isn't, there are entire courses in finance, devoted to the considerations that enter into the determination, of an appropriate risk adjusted interest rate to use to evaluate a project. We're just going to assume that this 10% risk…
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