Answers
a.
NPV with mitigation is $ 8.35 Million
IRR is 15.24 %
b.
NPV without mitigation is $ 15.31 Million
IRR is 19.86 %
Explanation:
Computation of NPV for both Projects:
Project with mitigation | Project without mitigation | |||||
Year | Computation of PV Factor | PV Factor @ 11 % (F) | Cash Flow C_{m} | PV (= F x C_{m}) | Cash Flow, C | PV (= F x C) |
0 | 1/(1+0.11)^0 | 1 | ($76,660,000) | ($76,660,000) | ($66,000,000) | ($66,000,000) |
1 | 1/(1+0.11)^1 | 0.90090090090 | $23,000,000 | $20,720,721 | $22,000,000 | $19,819,820 |
2 | 1/(1+0.11)^2 | 0.81162243324 | $23,000,000 | $18,667,316 | $22,000,000 | $17,855,694 |
3 | 1/(1+0.11)^3 | 0.73119138130 | $23,000,000 | $16,817,402 | $22,000,000 | $16,086,210 |
4 | 1/(1+0.11)^4 | 0.65873097415 | $23,000,000 | $15,150,812 | $22,000,000 | $14,492,081 |
5 | 1/(1+0.11)^5 | 0.59345132806 | $23,000,000 | $13,649,381 | $22,000,000 | $13,055,929 |
NPV | $8,345,631 | NPV | $15,309,734 |
Computation of IRR for both Projects:
A | B | B | |
1 | Year | Cash Flow (with mitigation) | Cash Flow, C (without mitigation) |
2 | 0 | ($76,660,000) | ($66,000,000) |
3 | 1 | $23,000,000 | $22,000,000 |
4 | 2 | $23,000,000 | $22,000,000 |
5 | 3 | $23,000,000 | $22,000,000 |
6 | 4 | $23,000,000 | $22,000,000 |
7 | 5 | $23,000,000 | $22,000,000 |
8 | IRR | 15.24% | 19.86% |
Let the excel sheet be looks like as the above table.
To compute IRR for the project with mitigation insert formula in B8 as “=IRR(B2:B7), which will display as 15.24 %
To compute IRR for the project without mitigation insert formula in C8 as “=IRR(C2:C7), which will display as 19.86 %
.