Question

Your factory has been offered a contract to produce a part for a new printer. The contract would last for three​ years, and your cash flows from the contract would be $5.01 million per year. Your upfront setup costs to be ready to produce the part would be $8.07 million. Your discount rate for this contract is 8.3%.

a. What is the​ IRR?

b. The NPV is $4.77 million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV​ rule?

a. What is the​ IRR?

The IRR is? (Round to two decimal​ places.)

Answer 1

a.Internal rate of return can be calculated using a financial calculator by inputting the below:

• •   Press the CF button.
• •   CF0= -$8.07 million. It is entered with a negative sign since it is a cash outflow.
• •   Cash flow for each year should be entered.
• •   Press Enter and down arrow after inputting each cash flow.
• •   After entering the last cash flow cash flow, press the IRR button to get the IRR of the project.

The IRR is 38.93%.

b.The NPV rule agrees with the IRR rule to accept the project. The project generates a positive NPV of $4.77 million. The project should be accepted according to the NPV decision rule since the project generates a positive net present value. The project should also be accepted according to the IRR decision rule since the internal rate of return is much higher than the discount rate.

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