Luft Watch Company is considering an investment of $15,000, which produces the following inflows:
Year ............Cash flow
1 ....................$8,000
2 ......................7,000
3 ......................4,000
You are going to use the NPV profile to approximate the value for the IRR. Please follow these steps:
a. Determine the NPV of the project based on a zero discount rate.
b. Determine the NPV of the project based on a 10 percent discount rate.
c. Determine the NPV of the project based on a 20 percent discount rate (it will be negative).
d. Draw a NPV profile for the investment. Observe the discount rate at which the NPV is zero. This is an approximation of the IRR on the project.
e. Actually compute the IRR. Compare your answers in parts d and e.