ModeldrillNPV, IRR and profitability index
A financial modeling exercise from Modeldrill. Solve it with a live spreadsheet grid in your browser, with Fill right and Fill down, and it is checked the moment you submit.
The task
The project costs the year 0 amount in B5 and returns cash in years 1 to 5. Find the NPV at the rate in B2 (B7, using NPV), the IRR (B8, using IRR) and the profitability index (B9: present value of the inflows divided by the initial cost).
What this exercise teaches
Putting the year 0 cash flow inside NPV discounts it by a year, which understates the cost and overstates value. IRR, by contrast, takes the whole row including year 0.
A hint if you get stuck
NPV assumes its first value comes one period from now. Leave year 0 out of the range and add it separately.
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