Question

# Suppose your firm is considering investing in a project with the cash flows shown below, that...

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.)

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.