In: Finance
You are evaluating a mining project that will require an initial investment outlay (time 0) of $700,000. The project will generate cash flows of $200,000 in Year 1, $300,000 in Year 2, and $400,000 in Year 3. There are no cash flows beyond Year 3.
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A. What is the NPV of the project at a discount rate of 10%? Explain calculations.
B. What is the IRR of the project? Explain calculations.
C. Should you invest in the project if the appropriate discount rate for the project is 10%? Explain.
D. If there was a negative cash flow in Year 4 (perhaps because of site cleanup), which decision rule (NPV or IRR) would you choose to evaluate this project and why?