Suppose you are offered $9,400 today but must make the following payments: Year ..................Cash Flows ($) 0

Question:

Suppose you are offered $9,400 today but must make the following payments:

Year ..................Cash Flows ($)

0 .................................$ 9,400

1 .................................−4,500

2 .................................−3,100

3 .................................−2,400

4 .................................−1,800

a. What is the IRR of this offer?

b. If the appropriate discount rate is 10 percent, should you accept this offer?

c. If the appropriate discount rate is 20 percent, should you accept this offer?

d. What is the NPV of the offer if the appropriate discount rate is 10 percent? 20 percent?

e. Are the decisions under the NPV rule in part (d) consistent with those of the IRR rule?

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...