Question

1. Find an internal rate of return (IRR) for these cash flows.

Use the following information to answer the next two questions. Consider the after-tax cash flows below: Year O 1 2 3 4 Cash Flow -$75,000| $5,3001 -$1,300 $498,000-$336,000 The required rate of return is 13.6 percent.

2. Should you use the IRR you calculated in the previous question to decide whether the project is acceptable? Explain

Please show all work. Thank you!

Answer 1

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

• Press the CF button.
• CF0= -$75,000. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
• Cash flow for each of the fifteen years should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is -28.94%.

b.The IRR should not be used to decide to decide whether the project is acceptable since the NPV is used to make decisions about project acceptance as it talks about the increase in value if the project is accepted.

Net present value is solved using a financial calculator. The steps to solve on the financial calculator:

• Press the CF button.
• CF0= -$75,000. It is entered with a negative sign since it is a cash outflow.
• Cash flow for the three year should be entered.
• Press Enter and down arrow after inputting each cash flow.
• After entering the last cash flow cash flow, press the NPV button and enter the required rate of return of 13.6%.
• Press the down arrow and CPT buttons to get the net present value.  

Net present value of cash flows at 13.6% required rate of return is $66,601.43.

The project should be accepted according to the net present value criteria since it generates a positive net present value.

In case of any further queries, kindly comment on the solution.