ur firm is considering investing in a project with the cash flows shown below, t

Question

ur firm is considering investing in a project with the cash flows shown below, that the required Suppose yo rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for your company are 3.0 and 3.5 years, respectively Time: Cash flow 2 5 3 -$244,000 $66,700 $84,900 $141,900 $122,900 $82,100 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? Rejected Accepted Hints References eBook & Resources Hint#1

Explanation / Answer

By using financial calculator or excel ,we get IRR as 27.48% which is morethan risk of the project i.e 10%

to calculate IRR in excel first right the cash flows from year o to year 5.Year 0 cashflow should be mentioned with negative sign.Then type "=IRR(range of cells from year 0 to year5) " you will get irr

Pay back period = 2 years +(244000 -151600)/141900 = 2.65 years

Discounted pay back period =3 years + (244000-237413.22)/83942.35 = 3.08 years

hence pay back period is less than 3 years and disccounted payback period is less than 3.5 years

Hence project should be accepted.

Year Cash flow cumulative c f Pvf @ 10 Disc cF cumulative Disccf 1 66700 66700 0.91 60636.36 60636.36 2 84900 151600 0.83 70165.29 130801.65 3 141900 293500 0.75 106611.57 237413.22 4 122900 416400 0.68 83942.35 321355.58 5 82100 498500 0.62 50977.64 372333.22

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.