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IRR Analysis for MBAT Plant Subsidies

The document summarizes four alternatives proposed for a MBAT plant project with an original IRR of 18% and NPV of -$37,666 at a 20% discount rate. Alternative A would subsidize the project to achieve a 25% IRR, with an NPV of -$122,101 over 4 years at a 25% discount rate. Alternative B would subsidize for a two-year payback, with an NPV of $218,856 over 4 years at 20%. Alternative C would subsidize to achieve an NPV target of $75,000, with a subsidy of $112,666 in year 0. The document recommends selecting the plan with the highest positive NPV at a 20%

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438 views4 pages

IRR Analysis for MBAT Plant Subsidies

The document summarizes four alternatives proposed for a MBAT plant project with an original IRR of 18% and NPV of -$37,666 at a 20% discount rate. Alternative A would subsidize the project to achieve a 25% IRR, with an NPV of -$122,101 over 4 years at a 25% discount rate. Alternative B would subsidize for a two-year payback, with an NPV of $218,856 over 4 years at 20%. Alternative C would subsidize to achieve an NPV target of $75,000, with a subsidy of $112,666 in year 0. The document recommends selecting the plan with the highest positive NPV at a 20%

Uploaded by

Aprva
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

Original Cash Flow:

NPV at
Years Cash flows for discount rate IRR
MBAT Plant 20%
Year 0 -1,000,000
Year 1 371,739
-37,666 18%
Year 2 371,739
Year 3 371,739
MBAT suggested four alternatives:
[A]Subsidize the project to bring its IRR to 25%.
Years Year 0 Year 1 Year 2 Year 3
Cash flows for MBAT Plant -1,000,000 371,739 371,739 371,739
NPV at discount rate 25% -122,101.18
IRR 25%

Year Year 0 Year 1 Year 2 Year 3


Cash flows for MBAT Plant -877,898 371,739 371,739 371,739
NPV at discount rate 20% 84,435.60
IRR 25%
Subsidy At IRR 25% -122,101.18

[B] Subsidize the project to provide a two-year payback.


Year Year 0 Year 1 Year 2 Year 3
Cash flows for MBAT Plant -743,478 371,739 371,739 371,739
NPV at discount rate 20% 218,855.60
IRR 35%
Subsidy At IRR 35% -256,481.46

Year 0 Year 1 Year 2 Discount


rate
$ 256,522.00 - - 20%
- $ 128,261.00 $ 128,261.00 20%
- - $ 256,522.00 20%
[C] Subsidize the project to provide an NPV of $75,000 when cash flows are discounte

Year Year 0 Year 1

Cash flows for MBAT Plant -1,000,000 371,739


NPV at discount rate 20% -37,666.40
NPV target 75,000.00
Subsidy at year 0 112,666.40

Year Year 0 Year 1


Year 4 Cash flows for MBAT Plant -887,334 371,739
371,739 NPV target at discount rate 20% 74,999.60

Which Plan will recommend : NPV at 20% for four years


Year 4
371,739 NPV values NPV at discount 20% ov
Plan A 122,101 5
Plan B 256,522 12
Plan C 112,666 5
Plan D 173,913 8

Year 4
371,739

PV at year 0

$ 256,522.00
$195,954.31
$178,140.28
hen cash flows are discounted at 20%.

Year 2 Year 3 Year 4

371,739 371,739 371,739


-37,666.40
75,000.00
112,666.40

Year 2 Year 3 Year 4


371,739 371,739 371,739
74,999.60

NPV at discount 20% over four years, NPV /(1.2)^4


58,884
123,709
54,334
83,870
Original Cash Flow:

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