Question

4. Consider a ten-year project with an after-tax cash flow of $11 in year t=1. You expect a constant growth rate of g=10% for the next ten years. The initial outflow is $100 in year t=0.

(a) What is the internal rate of return (IRR) on the project?

(b) According to the IRR rule, would you invest in this project at a cost of capital equal to 5%?

(c) A project can have only one NPV but multiple IRRs. True or False?

(d) Consider a project with non-standard cash flows and two IRRs. If both IRRs are greater than the project’s cost of capital, the project’s NPV is always positive. True or False?

Answer 1

1) The IRR for this Project is 8.13%.

2) IRR(8.13%) is greater than Cost of Capital(5%), hence would invest in the project

3) True, A project can have multiple IRRs, if the sign of Cash flow changes more than once. In this particular case, the cash flow sign changes only once and there is only one IRR

4) True, NPV will always be positive if the Project minimum IRR is greater than Cost of Capital

T	Cash Flow	IRR
0	-100	8.13%
1	10
2	11
3	12.1
4	13.31
5	14.641
6	16.1051
7	17.71561
8	19.487171
9	21.4358881
10	23.57947691