1. An investment has a required return of 13 percent. The cash flows, in order,

Question

1. An investment has a required return of 13 percent. The cash flows, in order, are -42,000 (initial cost), 16500 (CF1), 28400 (CF2), and 7500 (CF3). Based on the IRR, should this project be accepted? Why or why not?

a. No, the IRR exceeds the required return by about 0.06%

b. No, the IRR is less than the required return by about 0.94%

c. Yes, the IRR exceeds the required return by about 0.06%

d. Yes, the IRR exceeds the required return by about 0.94%

e. Yes, the IRR is less than the required return by about 0.06%

Explanation / Answer

Hi,

Please find the answer as follows:

To calculate IRR, you need to put the value of NPV as 0 and solve for r as follows:

NPV = 0 = -42000 + 16500/(1+r)^1 + 28400/(1+r)^2 + 7500/(1+r)^3

Solving for r, we get IRR as = 13.06%

Answer is Option C (Yes, the IRR exceeds the required return by about 0.06%)

Thanks.

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