Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 11 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3 and 3.5 years, respectively. Time: 0 1 2 3 4 5 Cash flow –$235,000 $65,800 $84,000 $141,000 $122,000 $81,200 Use the IRR decision rule to evaluate this project. (Do not round intermediate calculations and round your final answer to 2 decimal places.) IRR % Should it be accepted or rejected? Accepted Rejected

Answer 1

IRR is the rate of return that makes initial investment equal to present value of cash inflows

235,000 = 65,800 / (1 +R)¹ + 84,000 / (1 +R)⁴ + 141,000 / (1 +R)³ + 122,000 / (1 +R)⁴ + 81,200 / (1 +R)⁵

Usin trial and error method, i.e., after trying various values for R, lets try R as 28.79%

235,000 = 65,800 / (1 +0.2879)¹ + 84,000 / (1 +0.2879)⁴ + 141,000 / (1 +0.2879)³ + 122,000 / (1 +0.2879)⁴ + 81,200 / (1 +0.2879)⁵

235,000 = 235,000

Therefore, IRR is 28.79%