Question
Consider a project that requires an upfront payment of $500 in addition to payments of $100 each year for 5 years (starting one year from
Consider a project that requires an upfront payment of $500 in addition to payments of $100 each year for 5 years (starting one year from now). Suppose there is a 70% percent chance that the project is moderately successful and generates cash flows of $100 one year from now, $200 two years from now, $300 three years from now, $400 four years from now, and $500 five years from now. There is a 30% chance the project is very successful and generates cash flows of $200 one year from now, $400 two years from now, $600 three years from now, $800 four years from now, and $1000 five years from now. What is the expected net present value (NPV) of the project if the firm's discount rate is 5% (or 0.05)?
And what is the internal rate of return (IRR) of the project with cash flows?
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