Question

Your factory has been offered a contract to produce a part for a new printer. The contract would last for three? years, and your cash flows from the contract would be $ 5.08 million per year. Your upfront setup costs to be ready to produce the part would be $ 8.05 million. Your discount rate for this contract is 8.2 %. a. What is the? IRR? b. The NPV is $ 4.99 ?million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV? rule?

Answer 1

Answer and Explanation:

As per the data given in the question,

                  ($ million)                             ($ million)

Year Cash flows PVF at 8.2% Present value

0         -8.05             1                   -8.05

1          5.08             0.9242   4.70

2          5.08            0.8542           4.34

3           5.08             0.7894   4.01

Net present value                4.99

   

Internal rate of return                  0.40

Net present value = $4.99 million

The project should be accepted

Yes, The IRR rule is agree with NPV.

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