Look at the cash flows for projects F and G given below.   Cash Flows($) Project C0     C1   C2   C3   C4   C5   C6   C7   C8   IRR (%)   NPV at 10%   F (8,000 )   5,200   5,200   5,200   0   0   0   0   0   42.6   4,932   G (8,000 )   2,600   2,600   2,600   2,600   2,600   2,600   2,600   2,600   28.0   5,871     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%.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Look at the cash flows for projects F and G given below.

 

Cash Flows($)
Project C0     C1   C2   C3   C4   C5   C6   C7   C8   IRR (%)   NPV at 10%  
F (8,000 )   5,200   5,200   5,200   0   0   0   0   0   42.6   4,932  
G (8,000 )   2,600   2,600   2,600   2,600   2,600   2,600   2,600   2,600   28.0   5,871  
 


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%.

 

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