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 9 percent, and that the maximum allowable payback and discounted payback statistics for the project are 2.0 and 3.0 years, respectively Time Cash flow 4 5 6 -S7,100 $1,000 $2,200 $1,400 $1,400 $1,200 $1,000 Use the IRR decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. IRR Should it be accepted or rejected? Rejected O Accepted

Explanation / Answer

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

7100=1000/1.0x+2200/1.0x^2+1400/1.0x^3+1400/1.0x^4+1200/1.0x^5+1000/1.0x^6

Hence x=IRR=4.52%(Approx)

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

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