You are considering a project that requires an immediate investment of $10 million

(t=0), and which generates cash flows that start in three years, i.e., at the end of t=3.

The cash flow at the end of t=3 is $2 million, which is expected to grow forever at 3%.

You face some uncertainty over the discount rate, and so plan to approach this problem

using both the net present value (NPV) and internal rate of return (IRR) approaches.

Question: Let's go back to the NPV approach, and assume a discount rate of 12%. You want to do

some "sensitivity analysis" around the growth rate, because you're concerned that

perhaps 3% perpetual growth is aggressive. What would the NPV (assuming a 12%

discount rate) be if the growth rate were 0%? What about if revenues shrink at 4% per

year in perpetuity? 25 points.