White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows.
Question:
White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows.
Year Cash Flow
0............................................... $1,690,000
1................................................ -3,887,000
2................................................. 2,225,025
a. Calculate the NPV at the following discount rates and plot an NPV profile for this investment: 0%, 5%, 7.5%, 10%, 15%, 20%, 22.5%, 25%, 30%.
b. What does the NPV profile tell you about this investment’s IRR?
c. If the company follows the IRR decision rule and their cost of capital is 15%, should they accept or reject the opportunity? Why is it hard to make a decision on this investment based solely on the IRR rule?
d. If the company’s cost of capital is 15%, should they reject or accept the investment based on its NPV?
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:
Principles of Managerial Finance
ISBN: 978-0134476315
15th edition
Authors: Chad J. Zutter, Scott B. Smart