Question

You have been offered a very long-term investment opportunity to increase your money one hundredfold. You can invest $800 today and expect to receive $80,000 in 40 years. Your cost of capital for this (very risky) opportunity is 25%. What does the IRR rule say about whether the investment should be undertaken? What about the NPV rule? Do they agree? What is the IRR? The IRR of this investment opportunity is %. (Round to one decimal place.) What does the IRR rule say about whether the investment should be undertaken? 1 . (Select from the drop-down What is the NPV? . (Round to the nearest cont.) The NPV for the investment is $ What does the NPV rule suggest? The NPV rule says that you M. (Select from the drop-down Do they agree? Both rules agree V. (Select from the drop-down

Answer 1

IRR is the rate at which NPV is zero.

The IRR of this investment opportunity is 12.2%

IRR rule says that a project is worth undertaking if IRR is greater than cost of capital of the project.

As per the IRR rule, this investment should not be undertaken because IRR of this project (12.2%) is less than cost of capital (25%).

Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

In this case NPV is -$789.37 i.e. less than 0.

As per NPV rule, project should be undertaken if NPV is more than 0. Since the current NPV is less than 0, the project should not be undertaken  

Both NPV rule and IRR rule agree in this case as both suggest rejecting the project