O 2.51 years Question 7 2.5 pts A proposed project has an initial cost of $38,00

Question

O 2.51 years Question 7 2.5 pts 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. D 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. Yes; The IRR exceeds the required return by 0.58 percent. Question 8 2.5 pts

Explanation / Answer

Initial Cost = $ 38,000

Cash Inflows

Year 1    $ 12,300

Year 2    $ 22,400

Year 3    $ 16,100

Require Rate of Return is 16.8 %

At Internal Rate of Return (IRR)

NPV = 0 or,

Present Value of Cash Inflows = Initial Investment

Net Present Value at Required Rate is ( $ 949.49 )

Explanation

For the NPV to become zero, rate should to pushed down. If we take rate at 15.33 %, NPV of the project will become zero

Since the Internal Rate of Return is Less than Require Rate of Return by 1.47 % ( 16.8 % - 15.33 % )

The project should be rejected. As we assume that the Intermediate cash flows are reinvested at the rate of IRR. Hence for the Project to be accepted, if IRR is more than cost of capital.

Year Cash Inflow Discounting Factor (16.8%) Present Value of Cash flow Year 1 $ 12,300 0.8562 $ 10,530.82 Year 2 $ 22,400 0.7330 $ 16,419.59 Year 3 $ 16,100 0.6276 $ 10,104.01 Total PV of Cash flow $ 37054.52 Less Initial Cost    $ 38,000 NPV - $ 945.48

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