Question

Soft and Cuddly is considering a new toy that will produce the following cash flows. Should the company produce this toy based on IRR if the firm requires a rate of return of 17.5 percent?
Year 0: CF = -132.,000
Year 1: CF = 97,000
Year 2: CF = 42,000
Year 3: CF = 28,000

A) Yes, because the project's rate of return is 16.45 percent
B) Yes, because the project's rate of return is 11.47 percent
C) No, because the project's rate of return is 16.45 percent
D) No, because the project's rate of return is 11.47 percent
E) No, because the internal rate of return is zero percent

Answer 1

Answer:

C) No, because the project's rate of return is 16.45 percent

Explanation:

Year 0: CF = -132.,000

Year 1: CF = 97,000

Year 2: CF = 42,000

Year 3: CF = 28,000

using an excel spreadsheet we can calculate the project's IRR = 16.45%

the company established as a rule that it will only accept projects whose IRR is higher than 17%, but since this project's IRR is lower (16.45%), then it should be rejected.