Suppose your firm is considering investing in a project with the cash flows show
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Question
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively.
Use the IRR decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively.
Explanation / Answer
IRR is the rate at which NPV = 0
NPV is calculated by discounting the cashflows
PV = C/(1+r)^n
C - Cashflow
r - Discount rate
n - years to the cashflow
NPV = -344000 + 648000/(1+IRR)^1 + 83000/(1+IRR)^2 + 140000/(1+IRR)^3 + 121000/(1+IRR)^4 + 80200/(1+IRR)^5 = 0
By trail and error, IRR = 12.23%
Since IRR is less than cost of capital of 13%, project should not be accepted.
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