A firm evaluates all of is projects by applying the IRR Rule. If the required re

Question

A firm evaluates all of is projects by applying the IRR Rule. If the required return is 16 percent, would the firm accept the following project?
Year Cash Flow
0 - $34,000
1 $16,000
2 $18,000
3 $15,000


For the cash flows in the previous problem, supposed firm uses the NPV decision rule. At a required return of 11 percent, should the firm accept this project? What if the required return was 30 percent?

Explanation / Answer

For IRR, NPV =0 - $34,000 +$16,000/(1+r) +$18,000/(1+r)^2 + $15,000/(1+r)^3 = 0 r= 20.97% IRR >required return. The firm should accept NPV rule at 11% required return NPV =- $34,000 +$16,000/(1+11%) +$18,000/(1+11%)^2 + $15,000/(1+11%)^3 = $5,991.49 Firm should accept becauae of positive NPV NPV rule at 30% required return NPV =- $34,000 +$16,000/(1+30%) +$18,000/(1+30%)^2 + $15,000/(1+30%)^3 = $(4,213.93) Firm should reject becauae of negative NPV

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