Integrative-Multiple IRRs Froogle Enterprises is evaluating an unusual investmen

Question

Integrative-Multiple IRRs Froogle Enterprises is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following table EEB a. Why is it difficult to calculate the payback period for this project? b. Calculate the investment's net present value at each of the following discount rates: 0%, 5%, 10%, 15%, 20%, 25%, 30%, 35% C. What does your answer to part b tell you about this projects IRR? d. Should Froogle invest in this project if its cost of capital is 5%? What if the cost of capital is 15%? e. In general, when faced with a project like this, how should a firm decide whether to invest in the project or reject it? Data Table (Click on the icon located on the top-right cormer of the data table below in order to copy its contents into a spreadsheet.) a. Why is it difficult to calculate the payback period for this project? (Select the best answer below.) Year Cash flow $220,000 -S1.012.000 51,740,200 51,325,720 5377,520 A. It is unreal for a project to have a cash inflow as an initial investment. B. O C. O D. The oscillating cash flows make it difficult to compute the payback period The short life of the project makes it difficult to compute the payback period The huge amount of cash outflow in year 3 makes the calculation difficult. b. If the discount rate is 0%the investment's NPV is $ |. (Round to two decimal places.) If the discount rate is 5%, the investment's NPV is $ (Round to two decimal places) If the discount rate is 10%, the investment's NPV is S If the discount rate is 15%, the investment's NPV is 5 (Round to two decimal places.) If the discount rate is 20%, the investment's NPV is S (Round to two decimal places.) lf the discount rate is 25%, the investment's NPV is $ . (Round to two decimal places.) lfthe discount rate is 30%, the investment's NPV is 5 |" (Round to two decimal places.) lf the discount rate is 35%, the investment's NPV is $.. (Round to two decimal places.) c. What does your answer to part b tell you about this project's IRR? (Select the best answer below.) Print Done Round to two decimal places.) 0 A. There is no IRR for such cash flows O B. There are infinite IRRs for this project. O C. There are multiple IRRs for this project. D. There is only one IRR for this project d. Should Froogle invest in this project if its cost of capital is 5%? (Select the best answer below.) A.No OB, Yes Should Froogle invest in this project if its cost of capital is 15%? (Select the best answer below.) OA. Yes O B. No e. In general, when faced with a project like this, how should a firm decide whether to invest in the project or reject it? (Select the best answer below) ( A. It is best to use the payback period method. O B. It is best to use the IRR method ° C. It is best to use the NPV method. 0 D. None of the methods is suitable.

Explanation / Answer

a) A is correct.

b) NPV can be calculated using NPV function

c) C is correct

d) No. As at 5%, NPV < 0

Yes as at 15%, NPV > 0

e) C is correct.

NPV (0%) $0.00 NPV (5%) -$16.97 NPV (10%) $0.00 NPV (15%) $7.08 NPV (20%) $0.00 NPV (25%) -$8.45 NPV (30%) $0.00 NPV (35%) $43.47

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