Question: Consider the project with the given expected cash flows:
|
Year
|
Cash flow
|
|
0
|
-$ 500000
|
|
1
|
$100,000
|
|
2
|
$110,000
|
|
3
|
$550,000
|
[A] If the discount rate is 0%, compute the project's net present value?
[B] If the discount rate is 4%, compute the project's net present value?
[C] If the discount rate is 8%, compute the project's net present value?
[D] If the discount rate is 10%, compute the project's net present value?
[E] Compute this project's internal rate of return?
Now make a chart where the discount rate is on the horizontal axis (the "x" axis) & the net present value on the vertical axis [the Y axis]. Create the net present value of the project as a function of the discount rate by dots for the 4 discount rates. Connect the 4 points using a free hand 'smooth' curve. The curve intersects the horizontal line at a particular discount rate. Calculate the discount rate at which the graph intersects the horizontal axis?
Look at the graph you draw & write a short paragraph stating what the graph 'shows'.