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 $ 5.01 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 7.7 %. a. What is the​ IRR? b. The NPV is $ 4.95 ​million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV​ rule?

Answer 1

a.Internal rate of return can be calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$8.03 million. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
• Cash flow for each of the fifteen years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 39.32%.

Since the internal rate of return is higher than the cost of capital of 7.7%, the project should be accepted according to the IRR decision rule.

b.The IRR rule does agree with the NPV rule since both decision rules says to accept the project.