Quantitative Methods Q63
63Emad Gohar plans to invest in a project that requires an initial investment of $3 million. The project is expected to generate the following cash flows.
| Time | Cash flow |
| 1 | 20 million |
| 2 | 1.05 million |
| 3 | 0.90 million |
| 4 | 0.75 million |
The cost of capital is 10 percent. Which of the following statements best describes the decision Gohar should take based on the NPV and IRR rules?
- Option : C
- Explanation : Using a financial calculator, enter the cash flows to compute NPV and IRR. CF0 = - 3 million, CF1 = 1.2 million, CF2 = 1.05 million, CF3 = 0.9 million, CF4 = 0.75 million, I= 10%, CPT NPV = 0.147 million, CPT IRR = 12.44%. Since the NPV is positive and the IRR is greater than the cost of capital, both rules indicate that the project should be accepted.
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