An investment project has the following cash flows: CF0=-1,000,000; C01-C08=200,000 each a) If the required rate...

Question

Question

An investment project has the following cash flows: CF0=-1,000,000; C01-C08=200,000 each

a) If the required rate of return is 12%, what decision should be made using NPV?

b) How would the IRR decision rule be used for this project, and what decision would be reached?

c) How are the above two decisions related?

Answer 1

Answer #1

a.

NPV = -1,000,000 + 200,000[(1 - (1.12)^-8).0.12]

NPV = -$6,472.05

b.

IRR is the at whichNPV = 0,

So,

1,000,000 = 200,000[(1 - (1 + IRR)^-8).0.12]

IRR = 11.815%

c.

NPV is negative because IRR is smaller the required rate.

Answer 2

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