Question

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 $5.07 million per year. Your upfront setup costs to be ready to produce the part would be $7.94 million. Your discount rate for this contract is 7.7%.

a. What is the​ IRR?

b. The NPV is $5.20 million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV​ rule?

a. What is the​ IRR?

The IRR is ______ ​%. (Round to two decimal​ places.)

b. The NPV is $5.20 million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV​ rule?  ​(Select from the​ drop-down menu.)

The IRR rule (agrees, does not agree) with the NPV rule.

Answer 1

a.Internal rate of return is calculated using a financial calculator by inputting the below:

• Press the CF button.
• CF0= -$7,940,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for each year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 41.15%.

b.The IRR rule is to accept a project if the internal rate of return of 41.15% is higher than the cost of capital which is 7.7% here. So, the project should be accepted as per the IRR rule.

Therefore, the IRR rule agrees with the NPV rule.

In case of any query, kindly comment on the solution.