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.

Time:	0	1	2	3	4	5	6
Cash flow:	–$7,400	$1,120	$2,320	$1,520	$1,520	$1,320	$1,120

Use the IRR decision rule to evaluate this project.

IRR=__%

Answer 1

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

7,400=1,120/1.0x+2,320/1.0x^2+1,520/1.0x^3+1,520/1.0x^4+1,320/1.0x^5+1,120/1.0x^6

Hence x=irr=5.9%(Approx).

Hence since irr is less than required rate;project must be rejected.