a) Suppose the firm uses the IRR decision rule. Should the firm accept the proje

Question

a) Suppose the firm uses the IRR decision rule. Should the firm accept the project if the required return is 8%?

b.)Suppose the firm uses the IRR decision rule. Should the firm accept the project if the required return is 11%?

c.) Suppose the firm uses the NPV decision rule. Should the firm accept the project if the required return is 9%?

d.) Suppose the firm uses the NPV decision rule. Should the firm accept the project if the required return is 22%?

e.) Suppose the firm uses the NPV decision rule. Should the firm accept the project if the required return is 0%?

f.) Suppose the firm uses the PI decision rule. Should the firm accept the project if the required return is 7%?

g.) Suppose the firm uses the PI decision rule. Should the firm accept the project if the required return is 16%?

Year Cash Flow 0 -30,000 1 20,000 2 5,000 3 10,000

Explanation / Answer

IRR is the rate at which NPV = 0

NPV is calculated by discounting the cashflows

PV = C/(1+r)^n

C - Cashflow

r - Discount rate

n - years to the cashflow

a.

NPV = -30000 + 20000/(1+IRR)^1 + 5000/(1+IRR)^2 + 10000/(1+IRR)^3 = 0

By trail and error, IRR = 9.61%

Accept the project since IRR is greater than required rate.

B.

Reject the project since IRR is less than required rate of 11%.

C.

Accept the project as NPV is positive.

D.

Reject the project since NPV is negative

E.

Accept the project since NPV is positive.

F.

PI = (NPV+Initial investment)/Initial investment

PI = (1221.76+30000)/30000 = 1.04

Accept the project since PI is greater than 1.

g.

PI = (-2636.23+30000)/30000 = 0.91

Reject the project since PI is less than 1.

Rate 9.00% Year Cashflow (A) Discount rate = 1/(1+r)^(n) Present value of cashflow = A*discount rate 0 -30000.00 1.00 -30000.00 1 20000.00 0.92 18348.62 2 5000.00 0.84 4208.40 3 10000.00 0.77 7721.83 4 0.00 0.71 0.00 NPV 278.86

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