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Problems with the IRR metod
Acme Oscillators is considering an investment project that has the following rather unusual cash flow pattern.
Year: 0 Cash Flow: $98
Year: 1 Cash Flow: -459
Year: 2 Cash Flow: 792
Year: 3 Cash Flow: -602.5
Year: 4 Cash Flow: 171.3
a. Calculate the? project's NPV at each of the following discount? rates: 0?%, 5?%, 10?%, 20?%, 30%?, 40?%, 50?%.
b. What do the calculations tell you about this? project's IRR? The IRR rule tells managers to invest if a? project's IRR is greater than the cost of capital. If Acme? Oscillators' cost of capital is 8?%, should the company accept or reject this? investment?
c. Notice that this? project's greatest NPVs come at very high discount rates. Can you provide an intuitive explanation for that? pattern?
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