An investment has the following cash flows and a required return of 13 percent.

Question

An investment has the following cash flows and a required return of 13 percent. Based on IRR, should this project be accepted? Why or why not?

Year Cash Flow
0 -$42,000
1 $16,500
2 $28,400
3 $7,500


A. No; The IRR exceeds the required return by about 0.06 percent.
B. No; The IRR is less than the required return by about 0.94 percent.
C. Yes; The IRR exceeds the required return by about 0.06 percent.
D. Yes; The IRR exceeds the required return by about 0.94 percent.
E. Yes; The IRR is less than the required return by about 0.06 percent.

Explanation / Answer

IRR, 42,000= 16,500/r+( $28,400/r^2)+( $7,500/r^3) r= 13.062% difference= 13.06-13= .06% C. Yes; The IRR exceeds the required return by about 0.06 percent

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