The following table shows the forecast cash flows for two projects: C0C0 C1C1 C2C2 C3C3 C4C4 C5C5 A −$1,100 $30 $30 $30 $30 $1,280 B −1,100 80 80 1,100 Now suppose that the term structure is upward sloping and investors demand a higher return on the more distant flows as in the following table: t 1 2 3 4 5 rtrt 4.0% 4.5% 5.0% 5.5% 6.0% a-1. Calculate the IRR on the two projects. a-2. Calculate the NPV on the two projects. a-3. Do the two measures give the same ranking for the two projects?
The following table shows the forecast cash flows for two projects: C0C0 C1C1 C2C2 C3C3 C4C4 C5C5 A −$1,100 $30 $30 $30 $30 $1,280 B −1,100 80 80 1,100 Now suppose that the term structure is upward sloping and investors demand a higher return on the more distant flows as in the following table: t 1 2 3 4 5 rtrt 4.0% 4.5% 5.0% 5.5% 6.0% a-1. Calculate the IRR on the two projects. a-2. Calculate the NPV on the two projects. a-3. Do the two measures give the same ranking for the two projects?
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 7P
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Question
The following table shows the
| C0C0 | C1C1 | C2C2 | C3C3 | C4C4 | C5C5 | |
|---|---|---|---|---|---|---|
| A | −$1,100 | $30 | $30 | $30 | $30 | $1,280 |
| B | −1,100 | 80 | 80 | 1,100 |
Now suppose that the term structure is upward sloping and investors demand a higher return on the more distant flows as in the following table:
| t | |||||
| 1 | 2 | 3 | 4 | 5 | |
|---|---|---|---|---|---|
| rtrt | 4.0% | 4.5% | 5.0% | 5.5% | 6.0% |
a-1. Calculate the
a-2. Calculate the
a-3. Do the two measures give the same ranking for the two projects?
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