Suppose your firm is considering investing in a project with the cash flows show
ID: 2799026 • Letter: S
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 12 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 12 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 = -348000 + 65200/(1+IRR)^1 + 83400/(1+IRR)^2 + 140400/(1+IRR)^3 + 121400/(1+IRR)^4 + 80600/(1+IRR)^5 = 0
By trail and error, IRR = 11.95%
IRR is less than the required return of 12%. Hence, the project should be rejected.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.