Question

Internal rate of return. For each of the projects shown in the following table, calculate the internal rate of return (IRR). Then indicate, for each project, the maximum cost of capital that the firm could have and still find the IRR acceptable.
			Project A	Project B	Project C	Project D
		Initial investment	-$90,000	-$490,000	-$20,000	-$240,000
		Year	Cash inflows
		1	$20,000	$150,000	$7,500	$120,000
		2	25,000	150,000	7,500	100,000
		3	30,000	150,000	7,500	80,000
		4	35,000	150,000	7,500	60,000
		5	40,000		7,500
	Solution
		Project A
		CF0		-$90,000
		CF1		$20,000
		CF2		$25,000
		CF3		$30,000
		CF4		$35,000
		CF5		$40,000
		IRR
		If the firm’s cost of capital is below				the project would be acceptable.
		Project B
		CF0		-$490,000
		CF1		$150,000
		CF2		$150,000
		CF3		$150,000
		CF4		$150,000
		CF5		$ 0
		IRR
		If the firm’s cost of capital is below				the project would be acceptable.
		Project C
		CF0		-$20,000
		CF1		$7,500
		CF2		$7,500
		CF3		$7,500
		CF4		$7,500
		CF5		$7,500
		IRR
		If the firm’s cost of capital is below				the project would be acceptable.
		Project D
		CF0		-$240,000
		CF1		$120,000
		CF2		$100,000
		CF3		$80,000
		CF4		$60,000
		CF5		$ 0
		IRR
		If the firm’s cost of capital is below				the project would be acceptable

Answer 1