Question

Suppose you are offered $10,600 today but must make the following payments:

  

Year	Cash Flows ($)
0	$ 10,600
1	−4,900
2	−4,400
3	−3,400
4	−2,700

  

a.	What is the IRR of this offer? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

IRR

%

b.

If the appropriate discount rate is 14 percent, should you accept this offer?

	Accept
	Reject

c.

If the appropriate discount rate is 24 percent, should you accept this offer?

	Reject
	Accept

  

d-1.	What is the NPV of the offer if the appropriate discount rate is 14 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

  

d-2.	What is the NPV of the offer if the appropriate discount rate is 24 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV

$

Answer 1

a. Let the IRR = r.

Solving using equation solver, we get, IRR= r= 0.1894 = 18.94%

b. Since the discount rate < IRR, Reject.
c. Since the discount rate > IRR, Accept.

d-1. -$977.42.
d-2. $861.5.

Year	Cash Flow	PV (with r=14%)	PV (with r=24%)
0	10600	10600	10600
1	-4900	-4298.245614	-3951.612903
2	-4400	-3385.657125	-2861.602497
3	-3400	-2294.903155	-1783.256688
4	-2700	-1598.616749	-1142.028714
	NPV	-977.4226433	861.4991971

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