NPVQuestions Q 1 IRR A firm evaluates all

NPV-Questions

Q 1) IRR • A firm evaluates all of its projects by applying the IRR rule. If the required rate of return is 16%, should the firm accept the following project? Year Cash Flows 0 -34, 000 1 16, 000 2 18, 000 3 15, 000

Q 2) NPV • Mahjong, Inc. , has identified the following two mutally exclusive projects: • What is IRR? • If required rate of return is 11%, what is NPV of each projects? • Which one to pick? Does IRR and NPV agrees? If not, why? Year Cash Flow (A) Cash Flow (B) 0 -43, 000 1 23, 000 7, 000 2 17, 900 13, 800 2 12, 400 24, 000 4 9, 400 26, 000

Q 3) NPV • The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking up". As a result, the cemetery project will provide a net cash inflow of $106, 000 for the firm during the first year, and the cash flows are projected to grow at a rate of 4 percent per year forever. The project requires an initial investment of $1, 590, 000. • What is the NPV for the project if the required return is 10 percent? • The company is somewhat unsure about the assumption of a growth rate of 4 percent in its cash flows. At what constant growth rate would the company just break even if it still required a return of 10 percent on investment?