You can invest in a project with returns that depend on the amount of your investment. Specifically,
Question:
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?
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