Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 7 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively.

Time: | 0 | 1 | 2 | 3 | 4 | 5 | 6 |

Cash flow: | –$6,800 | $1,010 | $2,210 | $1,410 | $1,410 | $1,210 | $1,010 |

Use the IRR decision rule to evaluate this project.
**(Negative amount should be indicated by a minus sign. Round
your answer to 2 decimal places.)**

Answer #1

IRR is the rate which makes the NPV of a project as nil.

Year | Cash flow | 1+r | PVIF | PV = cash flow*PVIF |

0 | -6,800.00 | 1.061797 | 1.0000 | -6,800.00 |

1 | 1,010.00 | 0.9418 | 951.22 | |

2 | 2,210.00 | 0.8870 | 1,960.24 | |

3 | 1,410.00 | 0.8354 | 1,177.86 | |

4 | 1,410.00 | 0.7867 | 1,109.31 | |

5 | 1,210.00 | 0.7410 | 896.56 | |

6 | 1,010.00 | 0.6978 | 704.81 | |

NPV | 0.0000 |

Thus IRR = 1.061797 -1

= 6.18% (rounded to 2 decimal place)

**As IRR of 6.18%<required rate of return of 7% the
project should be rejected.**

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