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 10 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively.

Time:	0	1	2	3	4	5
Cash flow:	–$243,000	$66,600	$84,800	$141,800	$122,800	$82,000

Use the IRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Should it be accepted or rejected?

• accepted

• rejected

Answer 1

IRR using excel is 27.618%. At IRR, NPV is near $0.

Year	Cash flow	× discount rate	Present value
1	$   66,600	0.78359	$          52,187.00
2	$   84,800	0.61401	$          52,068.13
3	$ 141,800	0.48113	$          68,224.51
4	$ 122,800	0.37701	$          46,296.76
5	$   82,000	0.29542	$          24,224.46
Present value of inflows	$       243,000.86
Less: investment	$      (243,000.00)
NPV	$                    0.86

IRR is greater than required 10%

Answer is ACCEPT