[HW 1.1a] Intro – NPV and IRR  

1.   NPV

1A. Your friend has asked for your help in evaluating investing in a health club that costs $1,000,000.  She is 100% confident that the investment will pay her back $20,000 at the end of the 2nd year, an additional $30,000 at the end of the 4th year, $660,000 at the end of the 6th year, $400,000 at the end of the 8th year, and $700,000 at the end of the 10th year.  This seems like a good deal, since the total payments that she will collect is $1,810,000.  An alternative use for the money, however, would pay her a certain 12% per year.  What do you tell your friend?

1B. Another investment that your friend asked for your help in evaluating investing in a night club that also costs $1,000,000.  This investment will pay her back $700,000 at the end of the 2nd year, an additional $400,000 at the end of the 4th year, $660,000 at the end of the 6th year, $30,000 at the end of the 8th year, and $20,000 at the end of the 10th year.  This also seems like a good deal, since the total payments that she will collect is $1,810,000.  On a present value basis, at the same discount rate, and assuming that she is just as likely to collect on either investment, what’s the benefit of investing in the health club vs. the night club?

2.   IRR
2a. What’s the internal rate of return of the night club?
2b. What’s the internal rate of return of the health club?

3.   Proof
Show the discount factors that you would apply and all the math necessary to “prove” that the NPV and IRR figures you came up with in questions 1 and 2 are accurate (3A and 3B). Make sure that your math agrees with your use of =NPV and =IRR in questions 1 and 2.

4.   Naming and Formatting
Format your homework assignment nicely, using the VBA page setup macro you’ve just written.
Print it out and hand it in at the beginning of the next class.

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