Question

UTA wants to add a feature to their registration webpage and the cost to update is $ 15,000 and the benefits are expected to $25,000 over 2 years. What is the Internal Rate of Return and what decision would you make based the Internal Rate of Return Value?

Answer 1

Cost = 15000

IRR is the rate at which the NPV of a project equals 0.

0 = 25000/(1+IRR)^1 + 25000/(1+IRR)^2 - 15000

We will use the heat and trial method to get that value for which the above equation satisfies.

IRR = 136.99% Answer

As per IRR rule, we can accept a project whose cost of capital is lower than IRR.

Since we have not given any info about the cost of capital, it would be difficult to decide.

Additionally, since the IRR of this project is very high, assuming the cost of capital cannot be as high as IRR, we should accept the project.

Please let me know in case you have any queries and I will be happy to assist you.