You are considering an investment in a clothes distributor. The company needs $1

Question

You are considering an investment in a clothes distributor. The company needs $103,000 today and expects to repay you $130,000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 12%. What does the IRR rule say about whether you should invest?

What is the IRR of this investment opportunity?

The IRR of this investment opportunity is ____________(Round to one decimal place.)Given the riskiness of the investment opportunity, your cost of capital is 12%.

What does the IRR rule say about whether you should invest?The IRR rule says that you

should invest

should be indifferent

should not invest

. (Select from the drop-down menu.)

Explanation / Answer

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

103,000 =130,000/(1.0x)

Or x= 26.214%

Hence the IRR of this investment opportunity is 26.2% (approx)

Cost of Capital = 12%

The IRR rule says that one must accept. This is because the IRR is greater than the cost of capital.

Hence the correct answer is : should invest

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