Discount Rate, IRR, NPV

Question 1
A company is considering a project that produces the attached cash flows.

Assume that the appropriate discount rate for this project is 8%.
a) Compute the IRR of this project.

b) Compute the NPV of this project.

c) To select a project would you use IRR or NPV? Explain.

d) What is the economic interpretation of IRR and NPV?

Question 2
The AI corporation has a $150 M worth of common stock on which investors require a 17% rate of return. It also has $35 M in bonds that offer a 7% return.
a) Compute the WACC assuming that AI is subject to a 40% tax rate.

b) Re-compute the WACC assuming that the firm has $85 M in debt and $100 M in stock.

c) Explain why the WACC computed in b) may not be the correct answer if the capital structure changes.


Solution Summary

Discount Rate, IRR, and NPV are assessed.