Question

Company ABC is considering a project with the following projected cash flows (in thousands):

Year 0: -$60

Year 1: 10

Year 2: 20

Year 3: 30

Year 4: 40

Year 5: -$25

a. Assuming a 10% hurdle rate, the NPV for the project is

b. Assuming a 10% hurdle rate, the IRR for company ABC project is:

c. Based on the NPV calculation (10% hurdle rate) , should company ABC undertake the project

d. Based on the IRR calculation (10% hurdle rate) , should company ABC undertake the project

e. Assuming a 9% rate of return, should company ABC undertake the project.

Answer 1

a) and b)

c)

Based on NPV rule, ABC should not undertake the project as NPV<0

d)

Based on IRR rule , as IRR< hurdle rate, ABC should not accept the project

e)

Based on NPV and IRR rules, ABC should undertake the project.

Formulae

Formulae as above