(a) Explain the relationship between Net Present Value (NPV) and Yield

(Internal Rate of Return). (4 marks)

(b) A firm is considering an investment project costing £12 500. The estimated annual cash flows accruing at the end of each year are:

If the company has to borrow money to finance the project, is the maximum rate of interest it should pay for finance: 16%, 18%, 20%?
Give reasons for your answer.

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Year 1 2 500 Year 2 4 600 Year 3 5 700 Year 4 7 000