Question 1. Consider a project with the expected cash flows:
Year Cash flow
0 - $615,000
1 + 141,000
2 + 300,000
3 + $300,000
What is this project's internal rate of return?
If the discount rate is 0%, what is this project's net present value?
If the discount rate is 4%, what is this project's net present value?
If the discount rate is 8%, what is this project's net present value?
If the discount rate is 12%, what is this project's net present value?
Question 2. If you drew a chart with the discount rate (X axis)and the net present value (y axis, and you plotted the net present value of the project as a function of the discount rate by dots for the four discount rates, what is this discount rate at which the graph intersects the horizontal axis?
What would this graph mean to me?
Question 3. A project requiring a $3.2 million investment has a profitability index of 0.97. What is its net present value? (Remember: Profitability Index is defined as Present Value of the proceeds divided by the initial investment)
Which method do you think is the better one for making capital budgeting decisions - IRR or NPV? what would the determing factors be?