Long-term investment? decision, IRR method Billy and Mandy Jones have ?$25,000 t

Question

Long-term investment? decision, IRR method

Billy and Mandy Jones have ?$25,000 to invest. On? average, they do not make any investment that will not return at least 7.8% per year. They have been approached with an investment opportunity that requires ?$25,000 upfront and has a payout of ?$5,900 at the end of each of the next 5 years. Using the internal rate of return? (IRR) method and their? requirements, determine whether Billy and Mandy should undertake the investment.

The internal rate of return? (IRR) of this investment opportunity is: %

?Round to one decimal? place

Should they invest or no?

If the IRR is greater than the cost of? capital, accept the project. If the IRR is less than the cost of? capital, reject the project.

Explanation / Answer

IRR = 5.8%

They should not invest because IRR is less than cost of capital.  

0 1 2 3 4 5 Cashflow $     (25,000.00) $       5,900.00 $       5,900.00 $         5,900.00 $         5,900.00 $         5,900.00 Present Value $     (25,000.00) $       5,473.10 $       5,077.09 $         4,709.73 $         4,368.95 $         4,052.83 Net Present Value $            (1,303) IRR 5.8%

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