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VUSTUDENTS.NET TEAM.
Virtual University of Pakistan
Mr Ahmad, the director of Supreme Textile Limited, is deciding to install a new plant for fiber
spinning. Mr Ahmad has a choice to install a plant that will transform the raw cotton into yarn,
project costs Rs 2,000,000/- and will generate revenue of Rs 550,000 for the next five years.
Assume the company’s discount rate/cost of borrowing is 9%.
Calculate IRR for above project by using trial and error method.
First we calculate the NPV using the discount rate which is 9% given in question
NPV = CF0 + CF1/ (1+r) + CF2/ (1+r) 2 + CF3/ (1+r) 3 +CF4/ (1+r) 4 + CF5/ (1+r) 5
0= -2000000+504587+462924+424700+389633+357462
0= 139306
0= -2000000+491071+438456+391479+349534+312085
0= -17375
0= -2000000+492620+441226+395193+353964+317035
0= -2000000+2000038
So IRR is 11.648
Find the present value of a coupon bond, having face value Rs 1000/-, coupon rate of 12.5% per
annum with 7 years maturity. During current economic conditions the investor’s required rate
of return is 5%.
C= Coupon payment
I= Rate of return = 5%
N= periods = 7 years
= 12.5%*1000=125
R=i+𝜋e
R=14%-11%
R=3%