Question

An investment has the following cash flows. Should the project be accepted if it has been assigned a required return of 9.5%? Why or why not?

Year Cash Flow

0 -24,000

1 8,000

2 12,000

3 9,000

		No; because the IRR is 9.89%
		Yes; because the IRR exceeds the required return by about 0.39%
		Yes; because the IRR is less than the required return by about 3.9%
		Yes; because the IRR is positive

Answer 1

IRR is the rate at which NPV is 0. At 9.89% NPV comes to 0

Particulars	0	1	2	3	NPV
Cash flow	-24000	8000	12000	9000
PVIF @ 9.89%	1.0000	0.9100	0.8281	0.7536
PV	-24000	7280	9937	6782	0

Thus IRR = 9.89%

Since IRR is greater than required rate of return project should be accepted

Ans : Yes; because the IRR exceeds the required return by about 0.39%