You can invest in a project with returns that depend on the amount of your investment.

Specifically, the formula relating next year’s payoff (cash flow) to your investment today is C1

=



−C0

− $0.1, where C0 and C1 are measured in million dollars. For example, if you invest $500,000 in the project today, it will return

√

$0.5 − $0.1 ≈ $0.632 million next year. The prevailing interest rate is 6%

per annum. Use a spreadsheet to answer the following two questions:

(a) What is the IRR-maximizing investment choice of C0?What is the NPV at this level?

(b) What is the NPV-maximizing investment choice of C0?What is the IRR at this level?