White Rock Services Inc. has an opportunity to make an investment with the following projected cash...

White Rock Services Inc. has an opportunity to make an investment with the following projected cash flows.

Year	Cash Flow
0	$1,680,000
1	−3,885,000
2	2,225,027

a. Calculate the NPV at the following discount rates and plot an NPV profile for this investment: 0%, 5%, 7.5%,10%,15%,20%,22.5%,25%,30%.

b. What does the NPV profile tell you about this investment's IRR?

c. If the company follows the IRR decision rule and their cost of capital is 15%, should they accept or reject the opportunity? Why is it hard to make a decision on this investment based solely on the IRR rule?

d. If the company's cost of capital is 15%, should they reject or accept the investment based on its NPV?

Expert Solution

b) The investment's IRR is between 25% and 30% as seen by the graph intersecting at NPV = 0

c) As per IRR rule, there are two IRR's 26.85% and 4.45%. Hence it will be difficult to make a decision based on IRR rule

d)

The NPV of the cash flows is -$ 15,820.79. As NPV < 0, the investment must be rejected.

Formulae

jeff jeffy answered 11 months ago

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