Problem:
Suppose you are an inventor with an idea that will revolutionise the roofing industry for 2 years. To get your project off the ground you need $10M, after that the project is ex-pected to return $9M the first year and $3.025M for the second year. However, because of mafia links to the roofing business, the project is considered quite risky and requires a high return for investors of 20% for the first year. Since the risk is expected to be reduced in the second year, the required return for the second year cash flow is only 10% per year.
Required:
Question 1: Calculate the NPV for this project.
Question 2: Calculate the IRR for this project.
Question 3: Should the project be accepted? Why or why not?
Note: Please provide reasons to support your answer.