MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance
MyLab Finance with Pearson eText -- Access Card -- for Principles of Managerial Finance
15th Edition
ISBN: 9780134479903
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Chapter 10, Problem 10.28P

Problems with IRR White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows.

Year Cash Flow
0 $1,690,000
1 –3,887,000
2 2,225,025
  1. a. Calculate the NPV at the following discount rates and plot an NPV profile for this investment: 0%, 5%, 7.5%, 10%, 15%, 20%, 22.5%, 25%, 30%.
  2. b. What does the NPV profile tell you about this investment’s IRR?
  3. c. If the company follows the IRR decision rule and their cost of capital is 15%, should they accept or reject the opportunity? Why is it hard to make a decision on this investment based solely on the IRR rule?
  4. d. If the company’s cost of capital is 15%, should they reject or accept the investment based on its NPV?
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An individual is investing in a market where spot rates and forward rates apply. In this market, if at time t=0 he agrees to invest £5.3 for two years, he will receive £7.4 at time t=2 years. Alternatively, if at time t=0 he agrees to invest £5.3 at time t=1 for either one year or two years, he will receive £7.5 or £7.3 at times t=2 and t=3, respectively. Calculate the price per £5,000 nominal that the individual should pay for a fixed-interest bond bearing annual interest of 6.6% and is redeemable after 3 years at 110%. State your answer at 2 decimal places.
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