If a project requires $10 million investment at year 0, and creates a stream of annual payoffs that grow at 2% per year forever: the first payoff of $1 million arrives in year 1, the payoff in year 2 is $1.02 million (that is, it grows by 2%), and so on. Assume that the cost of capital is 10% per year, and that you face no financial constraint.
a. (5 pt) What is the NPV of the project? Would you accept the project based on NPV rule?
b. (5 pt) Based on IRR rule, would you accept the project? You need to show your calculation.
c. (5 pt) If the required payback period is 5 years, would you accept the project based on the payback rule? Again, you need to show your work (calculations, explanations).
d. (5 pt) If the required payback period is 5 years, would you accept the project based on the discounted payback rule? Show your work (calculations, explanations).
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If a project requires $10 million investment at year 0, and creates a stream of annual payoffs that...
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