Corporate finance

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Joined: Sat Jun 07, 2014 7:14 am

Corporate finance

Postby neha.kapoor318 » Mon Aug 11, 2014 6:20 am

Wilson flannery is concerned that this project has multiple IRRs.

Year 0 1 2 3
Cash Flows -50 100 0 -50

How many discount rates produce a zero NPV for this project?
A) One, a Discount rate of 0 percent
B) Two , a discount rates of 0 Percent and 32 percent.
C)Two, discount rates of 0 percent and 62 percent

Can you please explain the question in detail and also the reason for the correct answer . Not getting the logic?

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Corporate finance

Postby edupristine » Mon Aug 11, 2014 7:53 am

Ans is C.
1st- by putting NPV 0 in CF calculation we will get 0% IRR.
2nd- By manual calculation you can find out second value like this.
0= -50 + 100/(1+62%)^1 - 50/(1+62%)^3
0= 0

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Corporate finance

Postby pankaj » Thu Aug 14, 2014 10:42 am

To solve suck kind of questions, you need to do back calculation
So before doing any back calculation, remember that IRR is a discount rate that makes NPC equals to zero.
Use the normal way to calculate the NPV in your financial calci.
So here it goes!
CF0 = -50
C01 = 100
F01 = 1
C02 = 0
F02 =1
C03 = -50
F03 = 1
Press NPV button, it will ask for I (the discount rate). So from the given options pick the discount rate and check which all discount rate gives you NPV of Zero.
So, I = 0 , will give NPV = 0
And I = 62, will give NPV of -0.032. to solve this question assume this to be NPV of zero.
Other options will give you much higher NPV

Hope this helps!!

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