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: Suppose that you are unsure about 12% being an accurate measure of your cost of

capital (i.e., investors may view the project as more or less risky, and thus may demand

more or less than 12%). Faced with this uncertainty, you decide to calculate the internal

rate of return. What is the IRR of this project, assuming the same cash flows above and

growth rate? 25 points.