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Question: Davis Chili Company is considering an investment of $15,000, which produces the following inflows:

Year Cash Flow

1 $8,000

2 7,000

3 4,000

You are going to use the net present value profile to approximate the value for the internal rate of return. Please follow these steps:

a. Determine the net present value of the project based on a zero discount rate.

b. Determine the net present value of the project based on a 10 percent discount rate.

c. Determine the net present value of the project based on a 20 percent discount rate (it will be negative).

d. Draw a net present value profile for the investment and observe the discount rate at which the net present value is zero. This is an approximation of the internal rate of return based on the interpolation procedure presented in this chapter.

e. Actually compute the internal rate of return based on the interpolation procedure presented in this chapter. Compare your answers in parts d and e.

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Basic Finance, Finance

Category:- Basic Finance
Reference No.:- M92597142

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