Answer:
No; The IRR is less than the required return.
Explanation:
Calculation of IRR is given by the formula: Lr x NPVL / NPVL - NPVH x (Hr - Lr)
where
Lr = Lower rate of discount
Hr = Higher rate of discount
NPVH = NPV at Higher discount rate
NPVL = NPV at Lower discount rate
Assume a low discount rate of 1% and a high rate of 20%
<u>NPV at 1%</u>
<u>Particulars Year 0 Year 1 Year 2 Year 3</u>
Cash flows 152,000 71,800 86,900 (11,200)
DCF 1% 1 0.99 0.98 0.97
Present values (152,000) 71,082 85,162 (10,864)
NPV = $6,620
<u />
<u>NPV at 20%</u>
<u>Particulars Year 0 Year 1 Year 2 Year 3</u>
Cash flows 152,000 71,800 86,900 (11,200)
DCF 20% 1 0.83 0.69 0.58
Present values (152,000) 59,594 59,961 (6,496)
NPV = ($38,941)
Substituting values in the IRR formula we have:
1% x [($6,620 / ($6620 - (38,941))] x (20% - 1%) = 2.06%
Therefore we reject the project because it gives an IRR lower than the required rate of return of 15.5%
