A project has an initial cost of $68,300 and cash flows of $38,700, $102,300, an

Question

A project has an initial cost of $68,300 and cash flows of $38,700, $102,300, and -$18,100 for Years 1 to 3, respectively. If the required rate of return for this investment is 8.7 percent, should you accept it based solely on the internal rate of return rule? Why or why not?

Yes; because the IRR exceeds the required return Yes; because the IRR is a positive rate of return You cannot apply the IRR rule in this case because there are multiple IRRs. No; because the IRR is a negative rate of return No; because the IRR is less than the required return

Explanation / Answer

Here cash flows from the project are negattive for the last year. We will be having multiple IRRs in case of cash flows contains both positive and negative cash flows. In the instant case also, we will be having multiple IRRs therefore , decision can not solely based on IRR rule

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