Question

Ken is evaluating a proposed business project and he wants to know what is the Internal Rate of Return. Based on the following estimated Free Cash Flows and the IRR method, would this project be accepted? Ken’s required return is 12%. Year 0 1 2 3 4 Cash Flow $(2,976) $3,310 $4,510 $1,212 $445 a. Yes, because the IRR is higher than 12%, it’s 17.63%. b. Yes, because the NPV is greater than $2,976. c. No, because the IRR is lower than 12%, it’s 10.61% d. Yes, because the IRR is higher than 12%, it’s 99.37% e. No, because the IRR is lower than 12%, it’s -8.30%.

Answer 1

Project
IRR is the rate at which NPV =0
IRR	0.9936881
Year	0	1	2	3	4
Cash flow stream	-2976	3310	4510	1212	445
Discounting factor	1	1.993688	3.974792	7.924496	15.798973
Discounted cash flows project	-2976	1660.24	1134.65	152.9435	28.166387
NPV = Sum of discounted cash flows
NPV Project =	2.67736E-07
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	99.37%
Accept project as IRR is more than discount rate
Project
Discount rate	0.12
Year	0	1	2	3	4
Cash flow stream	-2976	3310	4510	1212	445
Discounting factor	1	1.12	1.2544	1.404928	1.5735194
Discounted cash flows project	-2976	2955.357	3595.344	862.6777	282.80554
NPV = Sum of discounted cash flows
NPV Project =	4720.18
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Accept project as NPV is positive

d is correct