Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern.
Year |
Cash Flow |
0 |
$100 |
1 |
−460 |
2 |
791 |
3 |
−602.6 |
4 |
171.6 |
a. Calculate the project's NPV at each of the following discount rates:
0%,
5%,
10%,
20%,
30%,
40%,
50%.
b. What do the calculations tell you about this project's IRR? The IRR rule tells managers to invest if a project's IRR is greater than the cost of capital. If Acme Oscillators' cost of capital is
8%,
should the company accept or reject this investment?
c. Notice that this project's greatest NPVs come at very high discount rates. Can you provide an intuitive explanation for that pattern?
As per rules I am answering the first 4 subparts of the question
1: NPV= C0+ CF1/(1+r)^1 + CF2/(1+r)^2 …………CFn/(1+r)^n
= 100-460/(1+0%)^1+791/(1+0%)^2-602.6/(1+0%)^3+171.6/(1+0%)^4
= 0
2: NPV= C0+ CF1/(1+r)^1 + CF2/(1+r)^2 …………CFn/(1+r)^n
= 100-460/(1+5%)^1+791/(1+5%)^2-602.6/(1+5%)^3+171.6/(1+5%)^4
= $-0.0077
3: NPV= C0+ CF1/(1+r)^1 + CF2/(1+r)^2 …………CFn/(1+r)^n
= 100-460/(1+10%)^1+791/(1+10%)^2-602.6/(1+10%)^3+171.6/(1+10%)^4
=0
4: NPV= C0+ CF1/(1+r)^1 + CF2/(1+r)^2 …………CFn/(1+r)^n
= 100-460/(1+20%)^1+791/(1+20%)^2-602.6/(1+20%)^3+171.6/(1+20%)^4
= 0
Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern....
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Problems with the IRR method Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern. Year AWNIO Cash Flow $100 - 460 793 - 602.3 171.3 a. Calculate the project's NPV at each of the following discount rates: 0%, 5%, 10%, 20%, 30%, 40%, 50%. b. What do the calculations tell you about this project's IRR? The IRR rule tells managers to invest if a project's IRR is greater than the cost of capital....
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