The Flour Baker is considering a project with the following cash flows. Should t

Question

The Flour Baker is considering a project with the following cash flows. Should this project be accepted based on its internal rate of return if the required return is 11 percent?

Select one:

a. Yes, because the project's rate of return is 7.78 percent

b. Yes, because the project's rate of return is 9.36 percent

c. No, because the project's rate of return is 7.78 percent

d. No, because the project's rate of return is 9.36 percent

e. No, because the project's rate of return is 13.08 percent

Year 0 1 2 3 4 Cash Flow -$59,000 $12,000 $24,000 $22,000 $13,000

Explanation / Answer

c. No, because the project's rate of return is 7.78 percent

IRR is that rate which equates the aggregated present value of cash flows with the aggregated value of cash outflows, it gives the NPV as zero.

The required rate of return is 11% whereas the internal rate of return is 7.78% which is much lower than the required rate of return and therefore the project must not be accepted.

Validation of IRR:

Annual cash flow 17750.00 Initial investment -59000.00 IRR multiple -3.32

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