Cutler Compacts Will Generate Cash Flows of $30,000 in Year

question 54

Essay

Cutler Compacts will generate cash flows of $30,000 in year one, and $65,000 in year two. However, if they make an immediate investment of $20,000, they can expect to have cash streams of $55,000 in year 1 and $63,000 in year 2 instead. The interest rate is 9%. Calculate the NPV of the proposed project. Why would the IRR be a poor choice in this situation?

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Definitions:

Self-Handicapping

A cognitive strategy where individuals avoid effort in the hopes of keeping potential failure from hurting self-esteem.

Situational

Pertaining to or influenced by the external environment, circumstances, or conditions rather than by individual traits or motivations.

Personality Characteristics

Traits and qualities that describe an individual's consistent behaviors, thoughts, and feelings.

Stable

Characterizing something that is unchanging, consistent, or not easily disturbed or upset over time.