Question

Evaluate the following project: CF₀ = +3,500; CF₁ = -1,200; CF₂ = +800; CF₃ = 0; CF₄ = -1,800. The risk adjusted cost of capital is 14%. The internal rate of return for the project is 13.3%. This project should be

Answer 1

*Any doubt please comment

The IRR is less than the hurdle rate i.e. the risk adjusted cost of capital of 14% .Hence as per the IRR rule the project should not be accpeted.

Using the NPV rule. The NPV is positive and as per the NPV rule the project must be accepted.

When there is a conflict between NPV and IRR, the NPV rules always is superior since the reinvestment assumptions associated with NPV are more realistic than IRR.

Hence, as per NPV the project should be accepted.

Year	Cash flows	PV Factor @14%	Discounted cash flows
0	3500	1	3500
1	-1200	0.877192982	-1052.631579
2	800	0.769467528	615.5740228
3	0	0.674971516	0
4	-1800	0.592080277	-1065.744499
NPV			1997.197945