Consider the following cash flow [-100, + 230, -132]. We want to decide under what range of
Question:
Consider the following cash flow [-100, + 230, -132]. We want to decide under what range of discount rate this is an advantageous investment. But noting the change in sign, we conclude IRR is not a suitable instrument. (10 marks) a. Write the expression for NPV using the unknown r as discount rate.
b. Write this expression as a function of [1/(1+r)].
c. Show that the expression in (b) as a quadratic equation. Look this up if necessary.
d. Solve the quadratic equation for its two roots.
e. Prepare a table of NPV vs. r for r= 0,10,20,40,100%.
f. Draw the graph of NVP vs. r.
g. Under what range of r values is this acceptable investment?
h. Noting that NPV increases then declines as r grows from 0 to 40%, determine at what level of r NPV is a maximum (recall that d(NPV)/ds = 0, where NPV is a maximum). If you have sufficient background, solve this using calculus. If not, graphically find the top of the NPV hill (where slope = 0).
Discount RateDepending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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