Question

A project has cash flows of –$148,400, $42,500, $83,200, and $42,600 for Years 0 to 3, respectively. The required rate of return is 6 percent. Based on the internal rate of return of _____ percent for this project, you should _____ the project. Multiple Choice

6.96; accept

6.55; accept

6.96; reject

6.55; reject

8.12; accept

Answer 1

First we will calculate npv at 2 discount rates

Year	cash flows	discount @ 6%	discount @ 7%	DCF@6%	DCF@7%
0	-148400	1	1	-148400	-148400
1	42500	0.94339	0.9345	40094.075	39716.25
2	83200	0.8899	0.8734	74039.68	72666.88
3	42600	0.8396	0.8162	35766.96	34770.12
			npv	1500.715	-1246.75

irr can be calculated using interpolation method

formula is

Lower rate +[ NPV at lower rate / (NPV at lower rate - NPV at higher rate)] * ( Higher rate - Lowe rate)

6%+(1500.715)/(1500.715+1246.75) =6.5462

so irr is 6.5462

answer is 6.55 accept

as irr is moore than required return we should accept the project