a.
Adequate information:
Year | Cash Flows |
0 | $8,700 |
1 | -$3,900 |
2 | -$2,900 |
3 | -$2,300 |
4 | -$1,800 |
To compute: The
Introduction: Internal rate of return (IRR) is defined as the discount rate at which the aggregate present value of net
b.
Adequate information:
Year | Cash Flows |
0 | $8,700 |
1 | -$3,900 |
2 | -$2,900 |
3 | -$2,300 |
4 | -$1,800 |
Appropriate discount rate = 10%
To determine: Whether the offer should be accepted if the appropriate discount rate is 10%.
Introduction: Internal rate of return refers to the discount rate at which the
c.
Adequate information:
Year | Cash Flows |
0 | $8,700 |
1 | -$3,900 |
2 | -$2,900 |
3 | -$2,300 |
4 | -$1,800 |
Appropriate discount rate = 20%
To compute: Whether the offer should be accepted if the appropriate discount rate is 20%.
Introduction: Internal rate of return refers to the discount rate at which the net present value of the project is zero.
d.
Adequate information:
Year | Cash Flows |
0 | $8,700 |
1 | -$3,900 |
2 | -$2,900 |
3 | -$2,300 |
4 | -$1,800 |
To compute:
- The net present value (NPV) of the offer if the appropriate discount rate is 10%.
- The net present value (NPV) of the offer if the appropriate discount rate is 20%.
Introduction: Net present value is defined as the summation of the present value of cash inflows in each period minus the summation of the present value of
e.
Adequate information:
Year | Cash Flows |
0 | $8,700 |
1 | -$3,900 |
2 | -$2,900 |
3 | -$2,300 |
4 | -$1,800 |
To explain: Whether the decisions under the NPV rule are consistent with those of the IRR rule.
Introduction:
The Internal Rate of Return (IRR) is the discount rate that will equate the present value of the cash inflows to the present value of the cash outflows.
The Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows of a proposal.
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