Question

A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and $16,100 for Years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on IRR, should this project be accepted? Why or why not?

Answer 1

Ans 17.38%

The project must be rejected since IRR of 17.38% exceed required rate of return of 16.8 percent.

Since COst of the project is 17.38% and the company expect to earn only 16.8%, so the project is not profitable.

Year	Project Cash Flows (i)	DF@ 20%	DF@ 20% (ii)	PV of Project ( (i) * (ii) )	DF@ 10% (iii)	PV of Project ( (i) * (iii) )
0	-38000	1	1	(38,000)	1	(38,000)
1	12300	1/((1+20%)^1)	0.833333	10,250	0.909	11,182
2	24200	1/((1+20%)^2)	0.694444	16,806	0.826	20,000
3	16100	1/((1+20%)^3)	0.578704	9,317	0.751	12,096
		NPV	(1,627)	NPV	5,278
	IRR =	Ra + NPVa / (NPVa - NPVb) * (Rb - Ra)
		10% + 5278 / (5278 + 1627)*10%
		17.38%