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.