Question

Q-3 (a) Define NPV and IRR
(b) A business requires initial investment of $390,000 with initial working capital of
$9000. Salvage value of old machine is 19900. Annual cash flow up to four year are
$72000 and $ 63000 in fifth year. Cash Savings up to five years are $28000.
Compute NPV and IRR at 8%.
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Answer 1

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(A) NPV:- NVP stands for net present value. In finance, the net present value or net present worth applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the discount rate. NPV accounts for the time value of money.

IRR:- IRR stands for internal rate of return.The internal rate of return is a measure of an investment’s expected future rate of return. As the IRR is an estimate of a future annual rate of return, IRR should not be confused with the actual achieved investment return of an historical investment. 

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