Problem 5-26 Calculating IRR Consider two streams of cash flows, A and B . Strea

Question

Problem 5-26 Calculating IRR

Consider two streams of cash flows, A and B . Stream A s first cash flow is $10,100 and is received three years from today. Future cash flows in Stream A grow by 4 percent in perpetuity. Stream B s first cash flow is ?$8,800, is received two years from today, and will continue in perpetuity. Assume that the appropriate discount rate is 12 percent.

What is the present value of each stream? (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16))

Suppose that the two streams are combined into one project, called C. What is the IRR of Project C? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

What is the correct IRR rule for Project C?

Consider two streams of cash flows, A and B . Stream A s first cash flow is $10,100 and is received three years from today. Future cash flows in Stream A grow by 4 percent in perpetuity. Stream B s first cash flow is ?$8,800, is received two years from today, and will continue in perpetuity. Assume that the appropriate discount rate is 12 percent.

Explanation / Answer

(a)

Stream A:

After 3 years, PV of cash flow = Cash flow / (discount rate

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