Say QAN is considering buying more airplanes to take advantage of future growth prospects. QAN are thinking of investing $700m in these airplanes now, and they think they can generate free cash flows (FCFs) of $100m, $370m and $400m over the next three years. Assume that a discount rate of 11% is reasonable for QAN.

 

(a) Calculate the net present value (NPV) of this project. Should the project be accepted or rejected? Explain your answer. (4 marks)

(b) Given your answer to Part (a), and without doing any calculations, is the internal rate of return (IRR) for the project greater than or less than 11%? Explain your answer. (2 marks)