Question

Suppose you are offered $8,800 today but must make the following payments:

  

Year	Cash Flows ($)
0	$ 8,800
1	−4,800
2	−3,500
3	−2,600
4	−1,400

  

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 13 percent, should you accept this offer?

	Reject
	Accept

c.

If the appropriate discount rate is 25 percent, should you accept this offer?

	Reject
	Accept

  

d-1.	What is the NPV of the offer if the appropriate discount rate is 13 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 25 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

Answer a.

Let IRR be i%

NPV = $8,800 - $4,800/(1+i) - $3,500/(1+i)^2 - $2,600/(1+i)^3 - $1,400/(1+i)^4
0 = $8,800 - $4,800/(1+i) - $3,500/(1+i)^2 - $2,600/(1+i)^3 - $1,400/(1+i)^4

Using financial calculator, i = 18.61%

IRR of this offer is 18.61%

Answer b.

Discount rate = 13%

NPV = $8,800 - $4,800/1.13 - $3,500/1.13^2 - $2,600/1.13^3 - $1,400/1.13^4
NPV = -$849.38

So, we should reject this offer.

Answer c.

Discount rate = 25%

NPV = $8,800 - $4,800/1.25 - $3,500/1.25^2 - $2,600/1.25^3 - $1,400/1.25^4
NPV = $815.36

So, we should accept this offer.

Answer d-1.

At discount rate of 13%, NPV of this offer is -$849.38

Answer d-2.

At discount rate of 25%, NPV of this offer is $815.36