A proposed project has an initial cost of $38.000 and cash inflows of $12.300. $

Question

A proposed project has an initial cost of $38.000 and cash inflows of $12.300. $22.400, and $16,100 for years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on IRR, should this project be accepted? Why or why not? O Yes: The IRR is less than the required return by 0.58 percent. No: The IRR exceeds the required return by 0.58 percent. D Yes: The IRR exceeds the required return by about 1.47 percent O No: The IRR is less than the required return by 1.47 percent. O Yes; The IRR exceeds the required return by 0.58 percent.

Explanation / Answer

Let irr be x%
At irr,present value of inflows=present value of outflows.

38000=12300/1.0x+22400/1.0x^2+16100/1.0x^3

Hence x=irr=15.33%(Approx)

Hence the project should not be accepted since irr is less than the required return by (16.8-15.33)=1.47%(Approx)(Option D)

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