Consider the below three investment projects generating cash flows as follows: Project 1 2 3 4 A 1,000,000 550,000 750,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 B 1,000,000 1,000,000 C Assume that the cost of capital is 10%. Use this cost of capital to discount (or inflate) all negative cash flows to the present time and all positive cash flows to period 1 in the below table. Then, calculate the IRR based on the cash flows of period 0 and 1. Project A 1 IRR B Using the above modified IRR, make investment decision for each project. Dose the modified IRR deliver correct decisions?
Consider the below three investment projects generating cash flows as follows: Project 1 2 3 4 A 1,000,000 550,000 750,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 B 1,000,000 1,000,000 C Assume that the cost of capital is 10%. Use this cost of capital to discount (or inflate) all negative cash flows to the present time and all positive cash flows to period 1 in the below table. Then, calculate the IRR based on the cash flows of period 0 and 1. Project A 1 IRR B Using the above modified IRR, make investment decision for each project. Dose the modified IRR deliver correct decisions?
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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Transcribed Image Text:1. Consider the below three investment projects generating cash flows as follows:
Project
1
2
3
4
-500,000
-500,000
-500,000
А
1,000,000
-500,000
-500,000
-500,000
-500,000
B
550,000
750,000
-500,000
1,000,000
1,000,000
-500,000
Assume that the cost of capital is 10%. Use this cost of capital to discount (or inflate)
all negative cash flows to the present time and all positive cash flows to period 1 in the
below table. Then, calculate the IRR based on the cash flows of period 0 and 1.
Project
1
IRR
А
B
Using the above modified IRR, make investment decision for each project. Dose the
modified IRR deliver correct decisions?
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