Problem:
Project C0 C1 C2 C3 C4 C5 Etc. IRR (%) NPV at 10%
F -9000 6000 5000 4000 0 0 ... 33 3592
G -9000 1800 1800 1800 1800 1800 ... 20 9000
H -6000 1200 1200 1200 1200 ... 20 6000
Look back to the cash flows for projects F and G in Section 5-3, the cost of capital was assumed to be 10%. Assume that the forecasted cash flows for projects of this type are overstated by 8% on average. That is, the forecast for each cash flow from each project should be reduced by 8%. But a lazy financial manager, unwilling to take the time to argue with the projects' sponsors, instructs them to use a discount rate of 18%.
Q1. What are the projects' true NPVs?
Q2. What are the NPVs at the 18% discount rate?
Q3. Are there any circumstances in which the 18% discount rate would give the correct NPV?