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In: Finance

Problems with IRR   White Rock Services Inc. has an opportunity to make an investment with the...

Problems with IRR  

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

Year

Cash Flow

0

​$1,690,000

1

−3,886,000

2

2,225,021

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?

Solutions

Expert Solution

jeff jeffy answered 3 months ago
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