Suppose your firm is considering investing in a project with the cash flows show

Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 13 percent, and that the maximum allowable payback and discounted payback statistics for your company are 2.5 and 3.0 years, respectively. Time: Cash flow 2 4 -$344,000 $64,800 $83,000 $140,000 $121,000 $80,200 Use the IRR decision rule to evaluate this project. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) IRR Should it be accepted or rejected? O Accepted O Rejected

Explanation / Answer

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

344000=64800/1.0x+83000/1.0x^2+140,000/1.0x^3+121000/1.0x^4+80200/1.0x^5

Hence x=IRR=12.23%(A;prox)

Hence since IRR is less than the required return;the project should be rejected.

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