Question

Your company is considering a new project opportunity. It would need to immediately invest $200. In return, in the next 4 years in will receive the following amounts of money:

In 1 year: $50

In 2 years: $60

In 3 years: $70

In 4 years: $80

The required annual rate of return is 19%.

Answer the following questions:

The Internal Rate of Return for this project is ___________ %. (Round your answer to TWO decimal places. Put your answer in percent, NOT in decimals. For example, if your answer is 12.34 percent, then you need to put 12.34, and NOT 0.12)

This project should be...

1. accepted
2. rejected

This project can be called:

1. ...non-conventional project
2. ...mutually exclusive project
3. ...project with conventional cash flows
4. ...crossover project
5. ...financing type project

Answer 1

IRR is the rate at which NPV is 0

So, here we have to calculate r,

200 = 50/(1+r)+60/(1+r)2+70/(1+r)3+80/(1+r)4

NPV at 19% required rate of return = 50/(1.19)+60/(1.19)2+70/(1.19)3+80/(1.19)4-200

= 165.82-200

= -34.18

And NPV at 10% = 50/(1.10)+60/(1.10)2+70/(1.10)3+80/(1.10)4-200

= 202.27-200

= 2.27

So the IRR falls between 10% and 20%, which is calculated as follow,

IRR = Lower rate + (NPV at lower rate/difference of NPV at lower rate and higher rate*difference of rates at which NPV calculated)

= 10+2.27/36.45*9

= 10+0.56

= 10.56%

So, the IRR is 10.56%

So this project should not be accepted since the IRR is lower than the required rate of return.

And this project can be called project conventional cash flow, since conventional projects are the projects with a negative cash flow (Cash outflows), which is expected to be followed by one or more future positive cash flows (Cash inflows).