Question

Marielle Machinery Works forecasts the following cash flows on a project under consideration. It uses the internal rate of return rule to accept or reject projects.

C0 C1 C2 C3 −

$ 10,200 0 + $ 7,700 + $ 8,700

Calculate the IRR. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

IRR % ?

Should this project be accepted if the required return is 14%?

Yes No

Answer 1

The cash flows are:
Cash flow (C0) in year 0=$10200
Cash flow (C1) in year 1=$0
Cash flow (C2) in year 2=+$7700
Cash flow (C3) in year 3=+$8700

Part 1:
Using excel, we determined the value of IRR=20.86%
As the initial investment is a cash outflow, we have taken it as negative in excel.

Part 2:
Yes, the project should be accepted because the value of IRR (that is 20.86%) is greater than the required return of 14%.
As per the IRR decision rule, if IRR>Required return, the project should be accepted.