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An investment project has the following cash flows: initial cost = $1,000,000; cash inflows = $200,000...

An investment project has the following cash flows: initial cost = $1,000,000; cash inflows = $200,000 per year for eight years. If the required rate of return is 12%: i) Compute the project’s NPV. What decision should be made using NPV? ii) Compute the project’s IRR. How would the IRR decision rule be used for this project, and what decision would be reached?

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Answer #1

Based on NPV, the project should be rejected as NPV is negative

IRR for the project is 11.8145%

Here, IRR being less than required rate of return, the project should be rejected

IRR (11.8145%) < Rate of Return required (12%)

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