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Unformatted text preview: Comprehensive Problem • An investment project has the following cash flows: CFO =-1,000,000; C01 - COB = 200,000 each • If the required rate of return is 120/0, what decision should be made using NPV? • How would the IRR decision rule be used for this project, and what decision would be reached? • How are the above two decisions related? 9-43 NPV = -$6,472; reject the project since it would lower the value ofthe firm. IRR = 11.81%, so reject the project since it would tie up investable funds in a project that will provide insufficient return. The NPV and IRR decision rules will provide the same decision for all independent projects with conventional/normal cash flow patterns. If a project adds value to the firm (i.e., has a positive NPV), then it must be expected to provide a return above that which is required. Both ofthose justifications are good for shareholders. 8.43 Chapter 9 Problems A company is analyzing two mutually exclusive project, S and L, whose cash flows are as follows: o 1 234 S -1,000 900 250 10 10 L -1,000 0 250 400 800 The company's cost of capital is 10% and it can get an unlimited amount of capital at that...
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This note was uploaded on 11/22/2011 for the course BMGT 340 taught by Professor White during the Fall '08 term at Maryland.
- Fall '08
- Corporate Finance