Question

You have been offered an opportunity to invest in a new hydrogen fuel-cell technology that is cheap, efficient, and produces no carbon emissions. The initial cost is $55,000, and the project will payoff $1.4 million in 30 years.

(a) Calculate the IRR of the project. If the cost of capital is 14 percent, would the IRR rule suggest you invest in this project?

(b) Do the IRR rule and NPV rule agree? Explain.

Answer 1

HI,

Here the cash flow is

Y0 Y30

-55,000 $1,400,000

An IRR is the discount rate when NPV of project is zero

so 0 = -55,000 +1,400,000/(1+IRR)^30

(1+IRR)^30 = 1400000/55000

IRR = 11.39%

SO the IRR is lower than cost of capital(14%) that means you should not invest in project

b) NPV = -55000 + 1400000/(1+15%)^30

NPV = -$27,522.2

So here NPV is also negative that means that means both IRR and NPV rules are saying that we should not invest in this project

Thanks