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A project requires an immediate investment of $20,000, and an additional investment of $10,000 in one...

A project requires an immediate investment of $20,000, and an additional investment of $10,000 in one year.It will generate an annual profit of$8000 in Years 2 to 8,and have a residual value of$5000 at the end of the eighth year. Calculate the project’s internal rate of return. Should the project be undertaken if the firm’s cost of capital is 14%? Find the Internal Rate of Return ( IRR ) and decide based upon the cost of capital ( 14% )

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Answer #1

Solution :

The Project's Internal Rate of Return = 17 %

As per the IRR Rule,

a. In case the IRR of the project is greater than its cost of capital, the project should be accepted.

b. In case the IRR of the project is lesser than its cost of capital, the project should not be accepted.

Since, the IRR of the project at 17 %, is greater than its cost of capital at 14 % , the project should be accepted.

Please find the attached excel sheet containing the detailed calculation for the above solution.

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