Consider the cash flows associated with undertaking project X.

a. Is this an early or later cash flow stream?

b. Based on the term structure of interest rates in exercise 10.5, what is the hurdle rate? What does such a hurdle rate represent?

c. Calculate the IRR for project X.

d. Based on the hurdle rate calculated and a comparison with the IRR, should Small Corp.
undertake the project?

e. If the sign of each cash flow were reversed, how would the hurdle rate and project IRR change?
How would Small Corp.’s decision change?
Why?

Small Corp. is investigating a possible new project, project X, which would affect corporate cash flow as follows:AppendixLO1

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Cash Flows (in $) of Small Corp. without Project X in Year 0 1 2 3 4 5 150 175 185 185 195 200 Cash Flows (in $) of Small Corp. with Project X in Year 0 1 2 3 4 5 110 165 200 205 210 213