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 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively.

  

  

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.)

  Time: 0 1 2 3 4 5 6   Cash flow –$6,800 $1,140 $2,340 $1,540 $1,540 $1,340 $1,140

Explanation / Answer

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

6800=1140/1.0x+2340/1.0x^2+1540/1.0x^3+1540/1.0x^4+1340/1.0x^5+1140/1.0x^6

Hence x=IRR=9.24%(Approx).

Hence since IRR is greater than the required return;the project should be accepted.

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