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Question
IRRs Froogle Enterprises is evaluating an unusual investment project. What makes the project unusual is the stream of cash inflows and outflows shown in the following table:
Year Cash flow
0 $ 200,000
1 920,000
2 1,582,000
3 1,205,200
4 343,200
a. Why is it difficult to calculate the payback period for this project?
b. Calculate the investment’s net present value at each of the following discount rates: 0%, 5%, 10%, 15%, 20%, 25%, 30% and 35%.
c. What does your answer to part b tell you about this project’s IRR?
d. Should Froogle invest in this project if its cost of capital is 5%? What if the cost of capital is 15%?
e. In general, when faced with a project like this, how should a firm decide whether to invest in the project or reject it?
Summary
The question is about Integrated multiple IRRs. A company named Froogle is evaluating options of investment. One of the projects is taken and it is evaluated for certain criteria such as calculation of payback period, net present value, cost of capital, etc.
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