In a situation such as Acron’s, where a one-time cost is followed by a sequence of cash flows, the internal rate of return (IRR) is the discount rate that makes the NPV equal to 0. The idea is that if the discount rate is greater than the IRR, the company will not pursue the project, but if the discount rate is less than the IRR, the project is financially attractive.
a. Use Excel’s Goal Seek tool to find the IRR for the Acron model.
b. Excel also has an IRR function. Look it up in online help to see how it works, and then use it on Acron’s model. Of course, you should get the same IRR as in part a.
c. Verify that the NPV is negative when the discount rate is slightly greater than the IRR, and that it is positive when the discount rate is slightly less than the IRR.
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