A firm is considering the following project: Cash Flows (Rs) C 0 C 1 C 2 C 3 C 4 C 5 – 50,000…

A firm is considering the following project:

                                                Cash Flows (Rs)

               C0             C1              C2             C3             C4             C5   

          – 50,000   + 11,300    + 12,769   + 14,429   + 16,305   + 18,421

(a)  Calculate the NPV for the project if the cost of capital is 10 per cent. What is the project’s IRR?

(b)  Recompute the project’s NPV assuming a cost of capital of 10 per cent for C1 and C2, of 12 per cent for C3 and C4, and 13 per cent for C5. Should the project be accepted? Can the internal rate of return method be used for accepting or rejecting the project under these conditions of changing cost of capital over time? Why or why not?

 

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