Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern. Year
Question:
Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern.
Year CFt
0..........................................$100.0
1...........................................-460.0
2............................................791.0
3...........................................-602.6
4............................................171.6
a. Calculate the project’s NPV at each of the following discount rates: 0%, 5%, 10%, 20%, 30%, 40%, 50%.
b. What do the calculations tell you about this project’s IRR? The IRR rule tells managers to invest if a project’s IRR is greater than the cost of capital. If Acme Oscillators’ cost of capital is 8%, should the company accept or reject this investment?
c. Notice that this project’s greatest NPVs come at very high discount rates. Can you provide an intuitive explanation for that pattern?
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...
Step by Step Answer:
a b IRR is the discount rate such that NPV 0 Here project NPV 0 for discount rates of 0 10 20 and 30 ...View the full answer
Principles of Managerial Finance
ISBN: 978-0134476315
15th edition
Authors: Chad J. Zutter, Scott B. Smart
