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Principles of Finance

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Principles of FinanceVideo Activity

Calculating NPV and IRR

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Businesses use NPV and IRR to determine whether or not a project will add value for shareholders. Watch this CFA® Level I Corporate Finance video to learn more. Working along with the video, you will gain practice in using your financial calculator to calculate IRR.

1 .
According to the video, how should a company use NPV and IRR to decide whether a project should be undertaken?
2 .
In the video, Trim Corp. is considering a project that is expected to have cash inflows of $350, $250, and $150 in years 1, 2, and 3, respectively. What do you think would happen to the NPV of the project if the company expected the same cash flows, but in reverse order? In other words, what do you think would happen to the NPV if the $150 were the cash inflow of year 1, $250 were the cash inflow for year 2, and $350 were the cash inflow for year 3? Using the same discount rate as in the video, 25%, calculate the NPV for the project with this string of cash outflows. Was the outcome what you thought it would be?

The Tokyo Olympics

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The capital investment a city must undertake to host the Olympic Games is massive. Learn more about the capital investments and expenses Tokyo faced as host of the 2020 Summer Olympics and how it was impacted by a global pandemic by watching this video, How the Tokyo Olympics Became the Most Expensive Summer Games Ever.

3 .
Given the costs discussed in the video, create an Excel spreadsheet to estimate the NPV and IRR of hosting the Olympic Games for a city.
4 .
How would the numbers in your Excel spreadsheet change because of the COVID-19 pandemic? Create an NPV profile for Tokyo’s Olympic Games given the changes that were caused by the pandemic.
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