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Cash flow

Cash flow

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11/25/2012

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Cash flow
Consider the project with the following expected cash flows: Year Cash flow 0 -\$600,000 1 70,000 2 140,000 3 +\$600,000 If the discount rate is 0%, what isthe project's net present value? If the discount rate is 5%, what is the project'snet present value? What is this project's internal rate of return?The internal rate of return of the project is 10%. Net present value at 0% and 5% are as follows:Year Cash Flow Present value factor at 0% Present Value at 0%0 -600,000 1 -600,0001 70,000 1 70,0002 140,000 1 140,0003 600,000 1 600,000Year Cash Flow Present value factor at 5% Present Value at 5%0 -600,000 0.9523 -571,3801 70,000 0.9523 66,6612 140,000 0.9523 133,3223 600,000 0.9523 571,380Consider a project with the expected cash flows: Year Cash flow 0 - \$48,000 1 +48,000 2 + 93,000 3 - \$93,000. What is this project's internal rate of return? If the discount rate is 5%, what is this project's net present value?Year Cash Flow Present value factor at 5% Present Value at 5%0 -48,000 0.9523 -45,7101 48,000 0.9523 45,7102 93,000 0.9523 88,5643 -93,000 0.9523 -88,564The internal rate of return for this project is un-calculate able.Part 2. Read the article linked below. Then write a one to two page paperanswering the following question: Which method do you think is the better onefor making capital budgeting decisions- IRR or NPV? Defend your answer with references to the background materials.- IRR does not keep track of the sign. This is misdirected. If you borrow money,you will pay the interest, not receive it. Interest rate tables use positive amountsand rates. Interest rate calculation routines use positive principal. We areaccustomed to keeping track of borrower and lender outside the actualcalculations.- IRR can supposedly give a different decision from NPV on mutually exclusiveprojects.- More than one IRR is possible with multiple sign changes. Additional IRRs can