Problem
Consider a potential investment project that has an initial cash outlay of -$25,000 now and free cash flows of $8,000, $9,500 and $11,000 over the next three years.
1) If the appropriate discount rate is 12%, calculate the net present value (NPV) of this project. Should the project be accepted or rejected? Explain why.
2) Without doing any calculations, explain what would happen to the NPV you calculate in part (1a) if you used a discount rate of 8%. Are you more likely to accept or reject the project?
3) If you were to calculate the internal rate of return (IRR) for this project, would it be less than or greater than 12%? Explain your answer.