Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern....

Transcribed Image Text:

Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern. Year Cash Flow 0 yr $101 1yr -461 2yr 789 3yr -602.2 4yr 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? Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern. Year Cash Flow 0 yr $101 1yr -461 2yr 789 3yr -602.2 4yr 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?

Answer rating: 100% (QA)

The detailed ... View the full answer