Question

Compute the IRR statistic for Project F. The appropriate cost of capital is 11 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

Project F
Time:	0	1	2	3	4
Cash flow:	−$11,600	$4,150	$4,980	$2,320	$2,950

Should the project be accepted or rejected?

• accepted

• rejected

Answer 1

IRR is the rate at which NPV is zero.

Lets compute NPV at 10% as shown below:

= - $ 11,600 + $ 4,150 / 1.10 + $ 4,980 / 1.10² + $ 2,320 / 1.10³ + $ 2,950 / 1.10⁴

= $ 46.36978348

Lets compute NPV at 11% as shown below:

= - $ 11,600 + $ 4,150 / 1.11 + $ 4,980 / 1.11² + $ 2,320 / 1.11³ + $ 2,950 / 1.11⁴

= - $ 179.7611654

It means the IRR lies between 10% and 11% since the initial investment of $ 11,600 is recovered between them and same is shown below:

= Lower rate + [ (Lower rate NPV / (Lower rate NPV - Higher rate NPV) ] x (Higher rate - lower rate)

= 10 + [ ($ 46.36978348) / ($ 46.36978348 - (- $ 179.7611654) ] x (11 - 10)

= 10.20% Approximately

Since the IRR is less than the cost of capital of 11%, hence the project shall be rejected.

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