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 $4.93 million per year. Your upfront setup costs to be ready to produce the part would be $7.93 million. Your discount rate for this contract is 8.2%. a. What is the IRR? b. The NPV is $4.73 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 $4.73 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.) with the NPV rule.

Answer 1

a)

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

Initial investment = Annuity * [1 - 1 / (1 + r)^n] / r

7.93 = 4.73 * [1 - 1 / (1 + r)^3] / r

Using trial and error method i.e., after trying various values for R, lets try R as 35.86%

7.93 = 4.73 * [1 - 1 / (1 + 0.3586)^3] / 0.3586

7.93 = 4.73 * [1 - 0.398772] / 0.3586

7.93 = 4.73 * 1.676597

7.93 = 7.93

Therefore, IRR is 35.86%

2)

Agree

A project should be accepted when IRR is greater than discount rate.