Question

Your factory has been offered a contract to produce a part for a new printer. The contract would last for three​ years, and your cash flows from the contract would be $ 4.93 million per year. Your upfront setup costs to be ready to produce the part would be $ 8.03 million. Your discount rate for this contract is 7.9 %. a. What is the​ IRR? b. The NPV is $ 4.70 ​million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV​ rule?

Answer 1

IRR is the internal rate of return i.e. it signifies that what rate is out the project is giving. It is calculated by choosing a rate for which the NPV comes to Zero.

So the cash flows are:

Setup Cost	Year 0	- $8,030,000
Cash Inflow	Year 1	+ $4,930,000
Cash Inflow	Year 2	+ $4,930,000
Cash Inflow	Year 3	+ $4,930,000

Using excel to find IRR

So IRR is 38.06825% that is greater than the contract discount rate 7.9%. So IRR rule says to accept the project.

So the IRR rule agrees with the NPV rule.

Additional Explanation

Mathematical formula of IRR for this question will be