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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow –$5,000 $1,200 $2,400 $1,600 $1,600 $1,400 $1,200 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.)

Explanation / Answer

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

5000=1200/1.0x+2400/1.0x^2+1600/1.0x^3+1600/1.0x^4+1400/1.0x^5+1200/1.0x^6

Hence x=IRR=22.69%(Approx)

Hence since IRR is greater than the required rate of return ;the project should be accepted.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.