Suppose you have the following initial outlay and free cash flow information on
ID: 2793203 • Letter: S
Question
Suppose you have the following initial outlay and free cash flow information on a potential investment project where upper management requires a payback period of 4 or fewer years (i.e. required payback period 3.99999 years) and that investors' Required Rate of Return is 15%. Also, suppose that you will make project acceptance or rejection decisions for each problem independently of decisions made in other problems.
Assuming that we want to find the project's Internal Rate of Return(IRR), what value must we set the project's Net Present Value (NPV) to?
Period
CF
0
-100,000
1
13,000
2
50,000
3
31,000
4
34,000
5
18,000
6
16,000
7
12,000
-$74,000.00
-$ 9,311.81
$0.00
$ 9,311.81
Period
CF
0
-100,000
1
13,000
2
50,000
3
31,000
4
34,000
5
18,000
6
16,000
7
12,000
Explanation / Answer
Option C.
IRR is the rate at which NPV = 0
It is the minimum required rate for the project to be accpeted, and generate positive NPV.
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