Question

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

Answer 1

Answer 1.

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%

Answer 2.

Required Return = 8.50%

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

Answer 3.

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.