Froogle Enterprises is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and
Year Cash flow
0 ....... $ 200,000
1 ........ –920,000
2 ....... 1,582,000
3 ........ –1,205,200
4 ........ 343,200
a. Why is it difficult to calculate the payback period for this project?
b. Calculate the investment’s net present value at each of the following discount rates: 0%, 5%, 10%, 15%, 20%, 25%, 30%, 35%.
c. What does your answer to part b tell you about this project’s IRR?
d. Should Froogle invest in this project if its cost of capital is 5%? What if the cost of capital is 15%?
e. In general, when faced with a project like this, how should a firm decide whether to invest in the project or reject it?
Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
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Question Posted: March 05, 2012 03:38:39