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 $5.06 million per year. Your upfront setup costs to be ready to produce the part would be $8.07 million. Your discount rate for this contract is 8.2%. a. What is the IRR? b. The NPV is $4.92 million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule?
Internal rate of return is calculated using a financial calculator by inputting the below:
The IRR is 39.71%.
The project should be accepted according to the IRR rule since the IRR is greater than the cost of capital of 8.2%. Therefore, the IRR rule agrees with the NPV rule.
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