Chapter 10, Problem 10.5WUE

Summary Introduction

To determine: The Net Present Value profiles for each project.

Introduction:

The difference between the present value of cash inflows and the present value of cash outflows for a particular time is known as the Net Present value.

$\begin{array}{c}NPV=\frac{{\text{CF}}_1}{{\left(\text{1}+r\right)}^1}+\frac{{\text{CF}}_2}{{\left(1+r\right)}^2}+\frac{{\text{CF}}_3}{{\left(1+r\right)}^3}+\frac{{\text{CF}}_4}{{\left(1+r\right)}^4}-I0\\ \end{array}$

Internal Rate of Return is a measure used in the capital budgeting which estimates the profitability of possible investments. IRR is computed as a discount rate, which makes the net present value of all cash flows from an investment as zero. NPV profile is a graphical depiction of the NPV of a project at different discount rates.