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i couldnt understand what these two paragraphs are trying to tell. could you explian in a more understandable way? In addition: 1. can you calculate
i couldnt understand what these two paragraphs are trying to tell. could you explian in a more understandable way? In addition: 1. can you calculate the npv of borrowing sth?? 2. why is the irr best interpreted rate of payment in this case? 3. what does it mean by underetimate cost of capital by 13.38% to make npv positive? (the last sentence in the picture) Figure 7.2 also illustrates the problem with using the IRR rule in this case. For most in- vestment opportunities, expenses occur initially and cash is received later. In this case, Star gets casbrupfront and incurs the costs of producing the book later, It is as if Star borrowed money-receiving cash today in exchange for a future liabilityand when you borrow money you prefer as low a rate as possible. In this case the IRR is best interpreted as the rate Star is paying rather than earning, and so Star's optimal rule is to borrow money as long as this rate is less than his cost of capital. Even though the IRR rule fails to give the correct answer in this case, the IRR itself still provides useful information in conjunction with the NPV rule. As mentioned earlier, IRR indicates how sensitive the investment decision is to uncertainty in the cost of capital esti- mate. In this case, the difference between the cost of capital and the IRR is large13,38%. Star would have to have underestimated the cost of capital by 13.38% to make the NPV positive. HP
i couldnt understand what these two paragraphs are trying to tell.
could you explian in a more understandable way?
In addition:
1. can you calculate the npv of borrowing sth??
2. why is the irr best interpreted rate of payment in this case?
3. what does it mean by underetimate cost of capital by 13.38% to make npv positive? (the last sentence in the picture)
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