Consider the following cash flow [-100 230 -132]. We want to decide under what range of discount rate this is an advantageous investment. But noting the change in sign we conclude IRR is not a suitable instrument. Write the expression for NPV using the unknown r as discount rate.Write this expression as a function of [1/(1 r)]. Show that the expression in (b) as a quadratic equation. Look this up if necessary.Solve the quadratic equation for its two roots.Prepare a table of NPV vs. r for r= 0 10 20 40 100%.Draw the graph of NVP vs. r.Under what range of r values is this an acceptable investment?Noting that NPV increases then declines as r grows from 0 to 40% determine at what level of r NPV is a maximum (recall that d(NPV)/ds = 0 where NPV is a maximum). If you have sufficient background solve this using calculus. If not graphically find the top of the NPV hill (where slope = 0). ?What is the maximum value of NPV? (There is one bonus point for the correct answer using calculus).
