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4. (3 points) You are trying to estimate the internal rate of return (IRR) of a...

4. (3 points) You are trying to estimate the internal rate of return (IRR) of a project using a trial and error process. The project has conventional cash flows. Your initial guess is 10%. You calculate net present value (NPV) of the project with 10% cost of capital and get a positive NPV. What would be your next guess for IRR? Why?

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Answer #1

At IRR = 10%,

NPV is positive,

It means present value cash inflows exceeds intial investment, and we need to reduce PV of cash inflows, so higher interest rate should be used as IRR.

Interest Rate > 10% sall be used upto the time when PV of cash inflows = Initial Investment and NPV = 0

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