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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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- Fall '08
- Corporate Finance