Consider two streams of cash flows, A and B. Stream A’s first cash flow is 7,000 and is received three years from today. Future cash flows in stream A grow by 3 percent in perpetuity. Stream B’s first cash flow is -8,000, is received two years from today, and will continue in perpetuity. Assume that the appropriate discount rate is 12 percent.
a. What is the present value of each stream?
b. Suppose that the two are combined into one project, called C. What is the IRR of Project C?
c. What is the correct IRR rule for Project C?