Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern: Year CFt 0 $100,000,000 1 −460,400,000 2 790,500,000 3 −601,600,000 4 171,500,000 a. Calculate the project's NPV at each of the following discount rates: 0%, 5%, 10%, 20%, 30%, 40%, 50%. b. What do the calculations tell you about this project's IRR? The IRR rule tells managers to invest if a project's IRR is greater than the cost of capital. If Acme Oscillators' cost of capital is 8%, should the company accept or reject this investment? c. Notice that this project's greatest NPVs come at very high discount rates. Can you provide an intuitive explanation for that pattern? d. If Acme Oscillators' cost of capital is 8%, should the company accept or reject this investment based on MIRR?
Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern: Year CFt 0 $100,000,000 1 −460,400,000 2 790,500,000 3 −601,600,000 4 171,500,000 a. Calculate the project's NPV at each of the following discount rates: 0%, 5%, 10%, 20%, 30%, 40%, 50%. b. What do the calculations tell you about this project's IRR? The IRR rule tells managers to invest if a project's IRR is greater than the cost of capital. If Acme Oscillators' cost of capital is 8%, should the company accept or reject this investment? c. Notice that this project's greatest NPVs come at very high discount rates. Can you provide an intuitive explanation for that pattern? d. If Acme Oscillators' cost of capital is 8%, should the company accept or reject this investment based on MIRR?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern:
|
Year
|
CFt
|
|
0
|
$100,000,000
|
|
1
|
−460,400,000
|
|
2
|
790,500,000
|
|
3
|
−601,600,000
|
|
4
|
171,500,000
|
a. Calculate the project's NPV at each of the following discount rates: 0%, 5%, 10%, 20%, 30%, 40%, 50%.
b. What do the calculations tell you about this project's IRR ? The IRR rule tells managers to invest if a project's IRR is greater than the cost of capital. If Acme Oscillators' cost of capital is 8%, should the company accept or reject this investment?
c. Notice that this project's greatest NPVs come at very high discount rates. Can you provide an intuitive explanation for that pattern?
d. If Acme Oscillators' cost of capital is 8%, should the company accept or reject this investment based on MIRR?
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