Question: Problems with IRR: Suppose you are offered $7,000 today but must make the following payments:
|
Year
|
Cash Flows ($)
|
|
0
|
$7,000
|
|
1
|
-3,700
|
|
2
|
-2,400
|
|
3
|
-1,500
|
|
4
|
-1,200
|
a) What is the IRR of this offer?
b) If the appropriate discount rate is 10 percent, should you accept this offer?
c) If the appropriate discount rate is 20 percent, should you accept this offer?
d) What is the NPV of the offer if the appropriate discount rate is 10 percent? 20 percent?
e) Are the decisions under the NPV rule (d) consistent with those of the IRR rule?