Suppose your firm is considering investing in a project with the cash flows show
ID: 2768498 • Letter: S
Question
Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback statistic for the project are 3.5 and 4.5 years, respectively. Use the IRR decision to evaluate this project; should it be accepted or rejected? A. IRR = 16.92 percent; accept the project B. IRR = 7.123 percent; reject the project C. IRR = 18.32 percent; accept the project D. IRR = 7.59 percent; reject the project
Cash Flows:
0: -5,000
1: 1,200
2: 1,400
3: 1,600
4: 1,600
5: 1,100
6: 2,000
Explanation / Answer
Calculation of NPV of the project with discount rate 16.92% , 7.123% , 18.32% and 7.59% Year Cash flow PV factor @ 16.92% Present Value PV factor @ 7.123% Present Value PV factor @ 18.32% Present Value PV factor @ 7.59% Present Value 0 -$5,000.00 1 -$5,000 1 -$5,000 1 -$5,000 1 -$5,000 1 $1,200.00 0.855285665 $1,026 0.933506343 $1,120 0.845165652 $1,014 0.92945441 $1,115 2 $1,400.00 0.731513569 $1,024 0.871434093 $1,220 0.71430498 $1,000 0.863885501 $1,209 3 $1,600.00 0.62565307 $1,001 0.813489253 $1,302 0.603706035 $966 0.802942189 $1,285 4 $1,600.00 0.535112102 $856 0.759397378 $1,215 0.510231605 $816 0.746298158 $1,194 5 $1,100.00 0.45767371 $503 0.708902269 $780 0.431230227 $474 0.693650115 $763 6 $2,000.00 0.391441764 $783 0.661764765 $1,324 0.364460976 $729 0.644716158 $1,289 $194 $1,960 $0 $1,856 At discount rate of 18.32% , the present value of cash flows is equal to zero. Hence IRR of the project is 18.32% The answer is option C i.e.IRR 18.32% accept the project.
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