Ms. Brown estimates the following cash flow for the first five years of operations, with cash flow leveling off in year 5. Year Cash flow Year 1 $695,000 Year 2= 876,250 Year 3= 1,057,500 Year 4= 1,238,750 Year 5= 1, 420,000 Calculate the IRR and NPV of this project utliizing a 12% discount rate and a 15% cap rate. Ms. brown was able to secure a loan for $1,540,000, and an equity investor agreed to invest the remaining $660,000 in exchange for 20% ownership in the project? 3) What would the investor's ROI be for this 5-year project? If the restaurant achieved the budgeted operating results for the year? 40 If the investor has a hurdle rate of 15%, does this project meet or exceed the investor's requirements?
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To calculate the IRR and NPV of the project, we need to discount the cash flows at the given discount rate of 12% and cap rate of 15%.
Step 1: Calculate the NPV (Net Present Value):
To calculate the NPV, we need to discount each cash flow to its present value and then sum up all the present values.
PV = Cash flow / (1 + r)^n
where PV is the present value, Cash flow is the cash flow for each year, r is the discount rate, and n is the number of years.
Using these formulas, we get:
Year 1: $695,000 / (1 + 0.12)^1 = $620,535.71
Year 2: $876,250 / (1 + 0.12)^2 = $698,042.95
Year 3: $1,057,500 / (1 + 0.12)^3 = $754,893.60
Year 4: $1,238,750 / (1 + 0.12)^4 = $826,689.56
Year 5: $1,420,000 / (1 + 0.12)^5 = $896,792.10
Now we sum up all the present values:
NPV = $620,535.71 + $698,042.95 + $754,893.60 + $826,689.56 + $896,792.10 = $3,796,954.92
Step 2: Calculate the IRR (Internal Rate of Return):
IRR is the discount rate at which the NPV of the project becomes zero. We can use the IRR function in a spreadsheet software or a financial calculator to find the IRR.
Using the cash flows provided, the IRR of the project is approximately 17.75%.
Moving on to the investor's ROI (Return on Investment), we need to calculate the total investment made by the investor:
Total Investment = Loan + Equity investment
Total Investment = $1,540,000 + $660,000 = $2,200,000
ROI = (Net Profit / Total Investment) * 100
The net profit can be calculated by subtracting the initial investment from the NPV:
Net Profit = NPV - Total Investment
Net Profit = $3,796,954.92 - $2,200,000 = $1,596,954.92
ROI = ($1,596,954.92 / $2,200,000) * 100 ≈ 72.59%
Finally, to determine if the project meets or exceeds the investor's requirements, we compare the investor's hurdle rate (15%) with the IRR (17.75%). Since the IRR is greater than the hurdle rate, the project exceeds the investor's requirements.