Smith invests in a limited partnership that requires an outlay of $9,200 today. At the end of years 1 through 5, he will receive the after-tax cash flows shown below. The partnership will be liquidated at the end of the fifth year. Smith is in the 28 percent tax bracket.

Years ___________ Cash Flows .....................

0 ........................ ($9,200) .................... CF0

1 ......................... $600 ....................... CF1

2 ........................ $2,300 ..................... CF2

3 ........................ $2,200 ..................... CF3

4 ......................... $6,800 ..................... CF4

5 ........................ $9,500 ..................... CF5

A. The after-tax IRR of this investment is

1. 17.41 percent.

2. 19.20 percent.

3. 24.18 percent.

4. 28.00 percent.

5. 33.58 percent.

B. Which of the following is/are correct?

1. The IRR is the discount rate that equates the present value of an investment's expected costs with the present value of the expected cash inflows.

2. The IRR is 24.18 percent, and the present value of the investment's expected cash flow is $9,200.

3. The IRR is 24.18 percent. For Smith to actually realize this rate of return, the investment's cash flows will have to be reinvested at the IRR.

4. If the cost of capital for this investment is 9 percent, the investment should be rejected because its net present value will be negative.

a. (2) and (4) only

b. (2) and (3) only

c. (1) only

d. (1), (2) and (3) only

e. (1) and (4) only