Auto Art sells original works of art on a prepaid basis as each piece is uniquel

Question

Auto Art sells original works of art on a prepaid basis as each piece is uniquely designed to the customer's specifications. For one project, the cash flows are $9,500 and -$10,300 for years 0 and 1, repectively. Based on the internal rate of return should this project be accepted if the required return is 12 percent?

A. Accept the project

B. Reject the project

C. The IRR cannot be used to evaluate this type of project

D. The firm should be indifferent to either accepting or rejecting this project

E. Insufficient information is provided to make a decision based on IRR

Explanation / Answer

Statement showing compuattion of IRR Particulars Time PVf@8% Amount PV Cash inflows                                 -          1.0000                                        9,500.00           9,500.00 Cash Outflows                            1.00        0.9259                                   (10,300.00)         (9,537.04) NPV               (37.04) Statement showing compuattion of IRR Particulars Time PVf@8.5% Amount PV Cash inflows                                 -          1.0000                                        9,500.00           9,500.00 Cash Outflows                            1.00        0.9217                                   (10,300.00)         (9,493.09) NPV                   6.91 NPV @8%                        (37.04) NPV @8.5%                            6.91 Diff for .5%                        (43.95) IRR = 8% + .5%*37.04/43.95 IRR = 8.42% Approx B. Reject the project Since reqd return is 12% and IRR is 8.42%

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