Question 1205241: b) In a certain undertaking the initial investment is TZS 1,000,000,000. Expected additional investment of TZS 800,000,000 and TZS 600,000,000 will made in the 2 ^ (nd) and 3 ^rd years respectively. Expected cash inflows at the end of each of the 4 years of the investment project are as follows;
YEAR
1
2
3
4
Cash flow in TZS
(In Millions)
600
800
1,000
2,000
Required
Given that, the required rate of return is 6%, evaluate the project using the NPV method
Answer by Theo(13342)   (Show Source):
You can put this solution on YOUR website! i'm not sure i've captured the problem correctly, but this is my first shot at it based on my understanding of what you have provided.
all investments are in millions.
at the end of the first year, you have invested 1000
at the end of the second year, you have invested 800
at the end of the third year, you have invested 600
at the end of the first year, you have received revenue of 600
at the end of the second year, you have received revenue of 800
at the end of the third year, you have received revenue of 1000
at the end of the fourth year, you have received revenue of 2000
under that assumption, the results are shown below.
your npv at 6% is equal to 1635.24
your internal rate of return is at .904160859 (approximately 90.42%)
your npv at 100% is equal to 0, as it should be.
this assumes that all expenditures are made at the end of the year indicated and all revenues are made at the end of the year indicated.
if we assume all expenditures are made at the beginning of the year indicated and all revenues are made at the end of the year indicated, you get a different npv and a different internal rate of return.
the results of that analysis are shown below.
note that the beginning of the year indicated is equivalent to the end of the year prior to the year indicated.
base on that, the beginning of year 1 is the same time point as the end of year 0.
this convention carries through all time points.
your npv at 6% is equal to 1413.13
your internal rate of return is at .339314242 (around 33.93%)
your npv at 100% is equal to 0, as it should be.
since the expenditures are made a year earlier than the revenue (beginning of the year for expenditures and end of the year for revenue), the npv is lower and the internal rate of return is lower.
the internal rate of return is the rate of return that provides an npv of 0.
that's when the present value of the expenditures is equal to the present value of the revenues.
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