Problems with Net Present Value
Not what you're looking for?
Project C0 C1 C2 C3 C4 C5 Etc. IRR (%) NPV at 10%
F -9000 6000 5000 4000 0 0 ... 33 3592
G -9000 1800 1800 1800 1800 1800 ... 20 9000
H -6000 1200 1200 1200 1200 ... 20 6000
Look back to the cash flows for projects F and G in Section 5-3, the cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 8% on average. That is, the forecast for each cash flow from each project should be reduced by 8%. But a lazy financial manager, unwilling to take the time to argue with the projects' sponsors, instructs them to use a discount rate of 18%.
a. What are the projects' true NPVs?
b. What are the NPVs at the 18% discount rate?
c. Are there any circumstances in which the 18% discount rate would give the correct NPV?
Purchase this Solution
Solution Summary
This solution helps with problems involving net present values.
Solution Preview
Project C0 C1 C2 C3 C4 C5 Etc. IRR(%) NPV at 10%
F -9000 6000 5000 4000 0 0 ... 33 3592
G -9000 1800 1800 1800 1800 1800 ... 20 9000
H -6000 1200 1200 1200 1200 ... 20 6000
Look back to the cash flows for projects F and G in Section 5-3, The cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 8% on average. That is, the forecast for each cash flow from each project should be reduced by 8%. But a lazy financial manager, unwilling to take the time to argue with the projects' sponsors, instructs them to use a discount rate of 18%.
a. What are the projects' true NPVs?
To cash flows are overstated by 8%, so we need to reduce the cash flows by 8% to get the true cash flows. The cash flows now would be 92% of the earlier cash flows and ...
Purchase this Solution
Free BrainMass Quizzes
Academic Reading and Writing: Critical Thinking
Importance of Critical Thinking
Income Streams
In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.
Social Media: Pinterest
This quiz introduces basic concepts of Pinterest social media
Balance Sheet
The Fundamental Classified Balance Sheet. What to know to make it easy.
Introduction to Finance
This quiz test introductory finance topics.