i) This is a Growing perpetuity formula. Remember the rate of discount and rate of return are one and the same thing.

A firm has invested $130,000 in a project. The project will return cash of $2,000 at the end of the first year, and every year in the future with a growth rate of 5%. That is, it will return $2,100 at the end of the second year, $2,205 at the end of the third year and so on.

What is the IRR for the project?

ii)

A firm is evaluating a product. The market demand for the product can be low or high.

The product requires an investment of $1,100.

If the market demand is low, then there is a 70% chance that the product will sell for $800 and a 30% chance it will sell for $1,200.

What is the NPV of the project if the market demand is low?