5 4 points Which of the following statements is CORRECT If a

5. (4 points) Which of the following statements is CORRECT? If a project has \"normal\" cash flows, then its MIRR must be positive. Ifa project has \"normal\" cash flows, then it will have exactly two real IRRs. The definition of \"normal\" cash flows is that the cash flow stream has one or more negative cash flows followed by a stream of positive cash flows and then one negative cash flow at the end of the project\'s life. a. b. c. d. If a project has \"normal\" cash flows, then it can have only one real IRR, whereas a project with \"nonnormal\" cash flows might have more than one real IRR. If a project has \"normal\" cash flows, then its IRR must be positive. e. 6. (30 points) Harry\'s Inc, is considering a project that has the following cash flow and WACC data. What are the project\'s NPV and IRR? Is it should be rejected or not? If you reject the project, explain why you reject it. WACC: 10.35% Year Cash flows$2,000 $600 S600 S500 $500 $400 a. What are the project\'s NPV and IRR? b. Is it should be rejected or not? If you reject the project, explain why you reject it.

Solution

5)

If a project has \"normal\" cash flows, then it can have only one real IRR, whereas a project with \"nonnormal\" cash flows might have more than one real IRR.

2)

NPV = Present value of cash inflows - present value of cash outflows

NPV = -2,000 + 600 / ( 1 + 0.1035)¹ + 600 / ( 1 + 0.1035)² + 500 / ( 1 + 0.1035)³ + 500 / ( 1 + 0.1035)⁴ + 400 / ( 1 + 0.1035)⁵  

NPV = -9.8047

IRR is the rate of return that makes NPV equal to 0

-2,000 + 600 / ( 1 + R)¹ + 600 / ( 1 + R)² + 500 / ( 1 + R)³ + 500 / ( 1 + R)⁴ + 400 / ( 1 + R)⁵ = 0

Using trial and error method, i.e, after trying various values for R. let\'s try 10.14

-2,000 + 600 / ( 1 + 0.1014)¹ + 600 / ( 1 + 0.1014)² + 500 / ( 1 + 0.1014)³ + 500 / ( 1 + 0.1014)⁴ + 400 / ( 1 + 0.1014)⁵ = 0

0 = 0

Therfore IRR is 10.14%

Project should be rejected as NPV is negative and IRR is less than the cost of capital of 10.35%