Question
1) A project has the following cash flows: Year 0 -$22,500, Year 1 $12,650, Year 2 $10,900, and Year 3 $6,500. What is the IRR
1) A project has the following cash flows:
Year 0 -$22,500, Year 1 $12,650, Year 2 $10,900, and Year 3 $6,500. What is the IRR of the project? Please round your answer to two decimal places.
2) Following question 1, suppose the cost of capital is 15%. Would you accept or reject the project according to the IRR criterion? Accept or Reject
3) Following questions 1 and 2, which of the following statements about the IRR rule is false?
- The IRR of the project would be higher if the cash flow in year 3 is increased to $7,500.
- The IRR of the project will remain the same as in question 1 even if the cost of capital is increased to 20%.
- The investment decision by the IRR rule will remain unchanged even if the cost of capital is increased to 20%.
- Both (B) and (C) are false.
4) OpenSeas Inc., is evaluating the purchase of a new cruise ship. The ship would cost $400 million today. OpenSeas expects annual cash flows from the new ship to be $70 million and these cash flows will last forever. The cost of capital is 16%. What is the IRR of the new cruise ship? Answer in unit of %
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