A project that requires an investment of $6,000 in the first year generates a positive net cash flow of $15,000 in the fourth year. It leaves the investor with an obligation to pay $10,000 in the eighth year, and yields no net cash flow in any other year. a. Find the NPV of this investment at the following interest rates: 0 percent, 5 percent, 10 percent, 15 percent, 20 percent.
b. This investment has two different IRRs. Find them, using the method illustrated in Worked-Out Problem 10.5 (page 341).
c. At what interest rates is this project profitable? (Create a graph similar to Figure 10.11 on page 337.) Is it always profitable when one of the IRRs exceeds the interest rate? What if both of the IRRs exceed the interest rate?
d. Why does this example produce two IRRs? How does it differ from the examples presented in this chapter? How does the relationship between the NPV and the interest rate change when you reduce the value of the payment in the eighth year from $10,000 to some smaller number? What happens to the IRRs?