Question

You have 3 projects with the following cash flows: O Year Project 1 Project 2 - $149 $21 $42 4 $79 -6,500 - 246 0 0 $58 6,996 81 - 826 20 41 58 a. For which of these projects is the IRR rule reliable? b. Estimate the IRR for each project (to the nearest 1%). c. What is the NPV of each project if the cost of capital is 5%? 20%? 50%? b. Estimate the IRR for each project (to the nearest 1%). The IRR for project 1 is The IRR for project 2 is %. (Round to the nearest integer.) %. (Round to the nearest integer.) The IRR for project 3 is %. (Round to the nearest integer.) c. What is the NPV of each project if the cost of capital is 5%? 20%? 50%? The NPV for project 1 for a cost of capital of 5% is $| |. (Round to the nearest cent.)

Answer 1

$ -149.00 $ 21.00 $ 42.00 $ 58.00$ 79.00 3 Projects Project 1 Cash flows Cost of capital IRR of cash flows NPV of cash flows 5% 10.60% 24.19 -826.00 $ - $ - $ 6,996.00 $ -6,500.00 Project 2 Cash flows Cost of capital IRR of cash flows NPV of cash flows 5% 10.54% -130.16 $ 81/ -246 Project 1 Cash flows Cost of capital IRR of cash flows NPV of cash flows 5% 10.62% -20.76

As project 2 has unconventional cash flows, IRR rule is reliable for project 1 and Project 3. A conventional cash flow pattern is one which has only a single change in cash flow direction.

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