Question

You have 3 projects with the following cash​ flows:

Year	0	1	2	3	4
Project 1	-$ 152	$22	$39	$58	$82
Project 2	−826	0	0	7,010	−6,506
Project 3	21	41	61	80	−247

a. For which of these projects is the IRR rule​ reliable?

b. Estimate the IRR for each project​ (to the nearest1%​).

c. What is the NPV of each project if the cost of capital is

5%​?20 %50%​?

a. For which of these projects is the IRR rule​ reliable?  ​(Select from the​ drop-down menus.)

The IRR rule is reliable for___?Unless all of the____? negative/positive? cash flows of the project precede the negative/positive?​ones, the IRR rule may give the wrong answer and should not be used.​ Furthermore, there may be multiple IRRs or the IRR may not exist.

2.You are considering making a movie. The movie is expected to cost $ 10.0million upfront and take a year to produce. After​ that, it is expected to make $ 5.0 million in the year it is released and $ 2.0$ million for the following four years. What is the payback period of this​ investment? If you require a payback period of two​ years, will you make the​ movie? Does the movie have positive NPV if the cost of capital is 10.0%​?

Answer 1

1.a) The IRR rule is reliable for Project 1. Unless all of the positive cash flows of the project precede the negative ​ones, the IRR rule may give the wrong answer and should not be used.​ Furthermore, there may be multiple IRRs or the IRR may not exist.

1 b)

1. c)

2)