Question
Consider a project that implies the following cash flow structure: $200 in year 0, -$150 in year 1 and -$80 in year 2. a. Compute
Consider a project that implies the following cash flow structure: $200 in year 0, -$150 in year 1 and -$80 in year 2.
a. Compute IRR of this project. Using the IRR investment rule, should you take this project if required rate of return is 10%? (3 points) b. Compute NPV of this project if required rate of return is 10%. Should you take this project according to the NPV rule? (3 points)
c. Suppose that the real required rate of return is 10%. Suppose that all cash flows are denominated in current dollars. You expect the inflation rate to be 3% for the coming two years. What is real NPV of this project, evaluated in period 0 dollars? Should you take this project if you use real NPV to make a decision? (4 points)
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