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 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: –$6,200 $1,030 $2,230 $1,430 $1,430 $1,230 $1,030 Use the IRR decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.)

Answer 1

Let irr be x%
At irr,present value of inflows=present value of outflows.

6200=1030/1.0x+2230/1.0x^2+1430/1.0x^3+1430/1.0x^4+1230/1.0x^5+1030/1.0x^6

Hence x=irr=9.86%(Approx).

Hence since irr is greater than required return;project must be accepted.