Froogle Enterprises is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following table:
Year Cash flow
0 ....... $ 200,000
1 ........ -920,000
2 ....... 1,582,000
3 ........ -1,205,200
4 ........ 343,200
a. Why is it difficult to calculate the payback period for this project?
b. Calculate the investment's net present value at each of the following discount rates: 0%, 5%, 10%, 15%, 20%, 25%, 30%, 35%.
c. What does your answer to part b tell you about this project's IRR?
d. Should Froogle invest in this project if its cost of capital is 5%? What if the cost of capital is 15%?
e. In general, when faced with a project like this, how should a firm decide whether to invest in the project or reject it?