loader  Loading... Please wait...

Question(s) / Instruction(s):

A student is completing an NPV analysis for his finance class.

The project being analyzed has the following cash flows.

Using a discount rate of 10% the NPV is $181.16.

 Year                      After-tax Cash flow         Discounted Cash flow (10%)

 0                            -1000                                                     -1000

 1                             350                                                        318.18

 2                             350                                                        289.26

 3                             400                                                        300.52

 4                             400                                                       273.20

                                 NPV                                                      181.16

 

The student then uses the discounted cash flow to compute the IRR.

He gets an IRR of 7.2%. 

  1. His numbers are correct, so he concludes the project should be rejected since one measure (IRR) signals rejection (IRR < Discount Rate).
  2. His numbers are correct, so he concludes the project should be accepted since one measure (NPV) signals acceptance (NPV > Zero).
  3. His numbers are not correct.  The IRR would be about 17.8% if the undiscounted cash flows are used.  Thus, both NPV and IRR indicate acceptance.
  4. He thinks there is a bug in his Excel program and writes a nasty letter to Microsoft.

Find Similar Answers by Subject


Student Reviews

Rate and review your solution! (Please rate on a Scale of 1 - 5. Top Rating is 5.)


Expert's Answer
Download Solution:
$1.79

This solution includes:

  • Plain text
  • Cited sources when necessary
  • Attached file(s)
  • Solution Document(s)



Reach Us

408-538-8534

20-3582-4059

39-008-4233

+1-408-904-6494