Question

A new IT server for a company will cost $425,469.00 today. The company expects the server will create an incremental cash flow to the firm of $141,695.00 per year. The company wants an 8.00% return for all capital budgeting projects. The company will run the server for the next 5 years. Based on the IRR and cost of capital, should they accept the project? (YES or NO) Answer Format: Text

Answer 1

Internal rate of return is the rate at which if we discount all the future cash flows, the resulting NPV will be zero, it is minimum rate of return that management seeks from the project, IRR of the asset/project must be greater than the required rate of return, otherwise it will not be feasible for the management to accept the project. Best way to calculate IRR is using Excel.

Year	Cash flow
0	-425469
1	141695
2	141695
3	141695
4	141695
5	141695
IRR	19.82%
Formula	=IRR(J21:J31)

IRR is greater than the required rate (8%), so company should accept the project.

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Hope this answer your query.

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