Suppose your firm is considering investing in a project with the cash flows show

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 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: Cash flow 0 -$8,900 $1,070 $2,270 $1,470 $1,470 $1,270 $1,070 2 4 Use the IRR decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.) IRR Should it be accepted or rejected? O Accepted O Rejected

Explanation / Answer

Let irr be x%
At irr,present value of inflows=present value of outflows

8900=1070/1.0x+2270/1.0x^2+1470/1.0x^3+1470/1.0x^4+1270/1.0x^5+1070/1.0x^6

Hence x=IRR=(0.95%)(Negative figure)

Hence since IRR is less than the required return;the project should be rejected.

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