1. What is the IRR of a project in which you invest $6,000 today and receive $2,000 at the end of each of the next 5 years, followed by $1,000 at the end of the 6th year?
a. 16.55%
b. 19.86%
c. 20.16%
d. 23.87%
e. None of the above
2. A project your firm is considering has a zero NPV when a cost of capital of 8.5% is used, and also a zero NPV when a cost of capital of 15% is used. The firm believes the appropriate cost of capital to use is actually 10%. Which of the following is true about the IRR method in this case, if any?
a. Because the average IRR of (8.5%+15%)/2 = 11.75% exceeds the cost of capital of 10%, the firm should accept the project.
b. The firm should reject the project because the IRR that is closer to the cost capital is 8.5%, which is less than the cost of capital.
c. The firm should not use the IRR method to evaluate the project and should instead use the NPV method.
d. We cannot determine if any of the above three statements are true, because the problem does not provide the information necessary to know the actual IRRs.