Consider the two investments below. The cash flows as well as the NPV and IRR
for the two investments are given. For both investments, the required rate of
return is 10%.
What discount rate would result in the same NPV for both investments?
A A rate between 0.00% and 10.00%
B A rate between 10.00% and 15.02%
C A rate between 15.02% and 16.37%
Ans will be between 10 and 15.02
You have to find out the fisherian rate through cash flow mode by doing investment 2
-investment 1
So CF0 =0
CF1=-36
FO1=3
CF2= 175-36= 139
COMPUTE IRR
IT WILL COME NEAR 13.15
SO AT THIS RATE YOUR BOTH PROJECTS NPV WILL BE SAME
HENCE ANS B
why did we subtract last cf
please explain
We have subtracted all the cash flows not only last
Investment 2 – Investment 1
would need further clarification please