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

Question

An investment has a required return of 13 percent. The cash flows, in order, are -$42,000 (initial cost), $16,500 (year 1 CF), $28,400 (year 2 CF) and $7,500 (year 3 CF). Based on IRR, should this project be accepted? Why or why not? Question 5 options: 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

C is correct

IRR= 13.0621% Time line 0 1 2 3 Cash flow -42000 16500 28400 7500 Discount factor =(1+ IRR)^N 1 1.130621 1.278304 1.445278 Discounted CF= Cash flow/Discount factor -42000 14593.75 22216.94 5189.315 NPV= Sum of discounted factor= 3.05E-06

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