Question

An investment costs $152,000 and has projected cash inflows of $71,800, $86,900, and −$11,200 for Years 1 to 3, respectively. If the required rate of return is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not? Multiple Choice Yes; The IRR is less than the required return. Yes; The IRR exceeds the required return. You should not apply the IRR rule in this case. No; The IRR is less than the required return. No; The IRR exceeds the required return.

Answer 1

Solution and Explanation:

The following is used in order to calculate the internal rate of return

year  Cash flow    

0 -$152000    

1 $71800    

2 $86900    

3 -$11200    

Internal rate of return -2.07 percent ( the internal rate of return has been calculated by using the excel sheet)  

The IRR rule cannot be applied in this case. Since, the cash flow direction changes twice, there are two internal rate of return. Thus, the Internal rate of return cannot be used to determine acceptance or the rejection.