Question
Question #1 Consider the following potential investment, which has the same risk as the firms other projects: Time Cash Flows 0 ($400,000) 1 $100,000 2
Question #1
Consider the following potential investment, which has the same risk as the firms other projects:
| Time | Cash Flows |
| 0 | ($400,000) |
| 1 | $100,000 |
| 2 | $102,000 |
| 3 | $105,000 |
| 4 | $110,000 |
| 5 | $110,000 |
| 6 | $115,000 |
What are the investments payback period, IRR, and NPV, assuming the firms WACC is 12%?
If the firm requires a payback period of less than 4 years, should this project be accepted? Be sure to justify your choice.
Based on the IRR and NPV rules, should this project be accepted? Be sure to justify your choice.
Which of the decision rules (payback, NPV, or IRR) do you think is the best rule for a firm to use when evaluating projects? Be sure to justify your choice.
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A Course In Derivative Securities
Authors: Kerry Back
2005th Edition
3540253734, 978-3540253730
