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Recall that the initial investment was $200. When we compare this to accumulated undiscounted cash flows, we see that payback occurs between Years 3 and 4. The cash flows for the first three years are $180 total, so, going into the fourth year, we are short by $20. The total cash flow in Year 4 is $200, so the payback is 3 + ($20/200) = 3.10 years.

Looking at the accumulated discounted cash flows, we see that the discounted payback occurs between Years 3 and 4. The sum of the discounted cash flows is $284.23, so the NPV is $84.23. Notice that this is the present value of the cash flows that occur after the discounted payback. To calculate the IRR, we might try some guesses, as in the following table:

Discount Rate

NPV(A)

NPV(B)

0%

$55.00

$50.00

0 0

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