Question

Stone Sour, Inc., has a project with the following cash flows:

   

Year	Cash Flow
0	–$	28,400
1		12,400
2		15,400
3		11,400

  

The required return is 15 percent. What is the IRR for this project? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

IRR

%

  

Should the firm accept the following project?

Reject Accept

Answer 1

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

28,400 = 12,400 / (1 + r)¹ + 15,400 / (1 + r)² + 11,400 / (1 + r)³

Using trial and error method, i.e., after trying various values for R, lets try R as 18.24%

28,400 = 12,400 / (1 + 0.1824)¹ + 15,400 / (1 + 0.1824)² + 11,400 / (1 + 0.1824)³

28,400 = 28,400

Therefore, IRR is 18.24%

Project should be accepted as IRR is greater than cost of capital of 15%