Question

A project has cash flows of -$152,000, $60,800, $62,300, and $65,000 for years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of _____ percent for this project, you should _____ the project. a. 14.67; accept b. 13.96; accept c. 11.32; reject d. 10.91; reject e. 18.46; reject

Answer 1

Answer:

c. 11.32; reject

Explanation:

The IRR is the rate at with net present value equals zero.

$-152,000 + \frac{60,800}{1+IRR} +\frac{62,300}{(1+IRR)^{2} } +\frac{65,000}{(1+ IRR)^{3} } = 0$

$\left[\begin{array}{cc}Period&Cash Flow\\0&-152,000\\1&+60,800\\2&+62,300\\3&+65,000\\4&0.113237029\\\end{array}\right]$

To solve it you use excel or a financial calculator:

0.1132370

Because the IRR is lower than minimun aceptable rate of return, the project should be rejected.