6. You are considering an investment with the following cash flows. If the requi
ID: 2781647 • Letter: 6
Question
6. You are considering an investment with the following cash flows. If the required rate of return for this investment is 14.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not?
Year Cash Flow
0 -152,000
1 98,2000
2 102,300
3 -4900
A.
Yes; The IRR exceeds the required return.
B.
Yes; The IRR is less than the required return.
C.
No; The IRR is less than the required return.
D.
No; The IRR exceeds the required return
E.
You cannot apply the IRR rule in this case.
A.
Yes; The IRR exceeds the required return.
Explanation / Answer
year 0 1 2 3
CF(000's) -152 982 102.3 -4.9
DF(@14.5%) 1/(1+0.145) 1/(1+0.145)2 1/(1+0.145)3
PV -152 857.64 78.03 -3.25
NPV = -152+857.64+78.03-3.25 = 780.41
As NPV is positive, IRR > required return
Yes; The IRR exceeds the required return (Option A)
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