Determine a simple project that costs $1,500 on Day One, and guarantees a return of $125 per year forever, starting at the end of the first year.
1. Calculate the Internal Rate of Return (IRR) for this project, and determine the Net Present Values (NPV) for annual discount rates of 5%, 7% and 10%.
2. What can you say about the value of NPV as the discount rate approaches infinity?
3. Demonstrate all of these answers in a diagram with NPV on the vertical axis and the annual discount rate (and IRR) on the horizontal axis. Label the IRR as point B.
4. Determine the magnitude of the vertical intercept of each and any curves drawn in part (3)?