Assume that you are the chief financial officer at Porter Memorial Hospital. The CEO has asked to to analyze two proposed capital investments Project X and Project Y. Each project requires a net investment outlay of $10,000, and the cost of capital for each project is 12%. The projects’ expected net cash flows are;
Year Project X Project Y
0 ($10,000) ($10,000)
1 6,500 3,000
2 3,000 3,000
3 3,000 3,000
4 1,000 3,000

Question; Calculate each project’s payback period, net present value, and internal rate of return.

Explanation:

Cost of Capital12%  

Project X      

Year                              0           1              2             3            4

Cah flow                    (10000)   6500  3000     3000     1000  

Discount Factor 12%     1 0.8929 0.7972   0.7118  0.6355

Present Value (10000) 5804 2392 2135 636  

Net Present Value  2.85 years  

Net Present Value  966      

Discount Factor 10% 1 0.9091 0.8264 0.7513 0.6830

Present Value (10000) 5909 2479 2254 683  

Net Present Value          1325      

IRR = Lower rate + ( higher rate - lower rate)

IRR = 0.10 + (0.12-0.10) = 17.38%

Project Y      

Year                              0            1              2          3            4

Cash flow     (10000) 3000 3000  3000  3000  

Discount Factor        1 0.8929 0.7972 0.7118 0.6355

Present Value(10000)2679   2392   2135  1907  

Payback                 Above 4 years    

Net Present Value   (888)    

Discount Factor 10% 1 0.9091 0.8264 0.7513 0.6830

Present Value(10000)    2727     2479       2254     2049

Net Present Value   (490)    

IRR = Lower rate + ( higher rate - lower rate)

IRR = 0.10 + (0.12-0.10) = 7.54%

it's actually a very difficult task, due to not many people can make 2 million dollars in 2 years. besides that, to the not-so-realistic ideas, you can create a business. it could be practically anything, but make it into a business that isn't that known yet, you get me? also, lets not forget about stock market. that's where all the good stuff happens. use investments at the beginning and begin to raise up your business or whatever you're going to do. as this is a very non-realistic idea, it's still worth the shot!