Question

# You've estimated the following cash flows (in \$) for a project: A B 1 Year Cash...

You've estimated the following cash flows (in \$) for a project:

 A B 1 Year Cash flow 2 0 -3,430 3 1 974 4 2 1,281 5 3 1,996

The required return is 8.5%.

1. What is the IRR for the project?

2. What is the NPV of the project?

3 .What should you do?

Check all that apply:

Reject the project based on its NPV

Reject the project based on its IRR

Accept the project based on its IRR

Accept the project based on its NPV

Let IRR be i%

NPV = -\$3,430 + \$974/(1+i) + \$1,281/(1+i)^2 + \$1,996/(1+i)^3
0 = -\$3,430 + \$974/(1+i) + \$1,281/(1+i)^2 + \$1,996/(1+i)^3

Using financial calculator, i = 10.20%

Internal Rate of Return = 10.20%

Required Return = 8.50%

NPV = -\$3,430 + \$974/1.0850 + \$1,281/1.0850^2 + \$1,996/1.0850^3
NPV = \$118.53

IRR is higher than required return; therefore, accept this project based on its IRR.
NPV is positive; therefore, accept this project based on its NPV.

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