Question 4 a) Consider the following cash flow diagram. What is the value orif t

Question

Question 4 a) Consider the following cash flow diagram. What is the value orif the rate of return is l 5%? S400 (3 marks) b) Consider the following "present worth versus interest rate" graph for a well behaved investment. If the interest rate at B is 20%, then which of the following best describes the analysis of the investment 1, the IRR of the investment is less than 20% ii. the IRR of the investment is equal to 20% iii, the IRR of the investment is greater than 20% iv. none of the above are true

Explanation / Answer

a) We need find X where, NPV becomes zero

NPV = (-400/(1+0.15)^0)+(246/(1+0.15)^1)+(246/(1+0.15)^2) = 0

So, X = 246

b) Option ii

It is the interest rate at which NPV = 0 and hence IRR of the investment is equal to 20%

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