consistent /raming Return to the illustration in Figure 15.2, where the cash flow sequence is -100, 290

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consistent /raming Return to the illustration in Figure 15.2, where the cash flow sequence is -100, 290 and -208. Assume r = 10% is the correct discount rate. Suppose we take the initial investment of 100 and invest it at r = 10%. In two periods this will grow to 100(1.10)2 = 121. Alternatively, suppose we invest in this project. In one yearwe receive 290. Take this amount and invest it for one year. Hence, at t = 2 we have 290(1.10) = 319. Of course, we also must payout an additional 208 at this point.

So we have 319 - 208 = 111. In this way, accepting the project is equivalent to investing 100 now and receiving 111 two periods later; rejecting the project is equivalent to investing 100 now and receiving 121 two periods later. How, then, can the project have internaI rates of retum of 30% and 60%? What principle of consistent frarning is violated here?

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