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 $4.96 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 8.3%.

The NPV is $4.64 million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule?

The IRR rule _____________ with the NPV rule

Answer 1

IRR rule agrees with the nPV rule since IRR is more than the cost of capital. Hence the project will be accepted.

Year	Cash flows
0	-8070000
1	4960000
2	4960000
3	4960000
IRR	38.15%

WORKINGS