A firm evaluates all of its projects by applying the IRR rule. If the required return...
A firm evaluates all of its projects by applying the IRR rule. If the required return is 18 percent, should the firm accept the following project?
|
Year |
Cash flow |
|
0 |
-$105,600 |
|
1 |
$29,500 |
|
2 |
$34,200 |
|
3 |
$16,750 |
|
4 |
$15,320 |
|
5 |
$25,670 |
5.26%. No. Please Show All Work
Homework Answers
IRR is the rate of return that makes Present value of cash inflows equal to initial investment
-105,600 = 29,500 / ( 1 + R)1 + 34,200 / ( 1 + R)2 + 16,750 / ( 1 + R)3 + 15,320 / ( 1 + R)4 + 25,670 / ( 1 + R)5
Using trail and error method, i.e after trying various values for R, let's try R as 5.26%
105,600 = 29,500 / ( 1 + 0.0526)1 + 34,200 / ( 1 + 0.0526)2 + 16,750 / ( 1 + 0.0526)3 + 15,320 / ( 1 + 0.0526)4 + 25,670 / ( 1 + 0.0526)5
105,600 = 105,600
Therefore IRR is 5.26%
We will NOT accept the project as the IRR is less than the cost of capital of 18%.
Note: It is always recommended to use a financial calculator to calculate IRR. Using trial and error method can be tie consuming.
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