Question

10-9:
Look back to the cash flows for projects F and G in 5-3. The costof capital was assumed to be 10%. Assume that the forecasted cashflows for projects of this type are over-stated by 8% on average.That is, the forecasted for each cash flow from each project shouldbe reduced by 8%. But a lazy financial manager, unwilling to takethe time to argue with the project’s sponsors, instructs them touse a discount rate of 18%.
a. What are the project’s true NPVs?
b. What are the NPVs at the 18% discount rate?
c. Are there any circumstances in which the 18% discount rate wouldgive the correct NPV’s (hint: Could upward bias be more severe formore-distant cash flows?)