Question

A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and $16,100 for years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on IRR, should this project be accepted? Why or why not? 14 Multiple Choice O No; The IRR exceeds the required return by .58 percent. O No: The IRR is less than the required return by 1.03 percent. O Yes: The IRR exceeds the required return by .58 percent. O Yes, The IRR exceeds the required return by about 103 percent. O Yes: The IRR is less than the required return by 58 percent

Answer 1

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Answer:

Option C

For calculating IRR, we can use interpolation method. To interpolate, we need two rates one that yields negative NPV and one that yields positive opv. NPV at 16% Year CF -38000 12300 24200 16100 P V factor 16% 1.0000 0.8621 0.7432 0.6407 NPV PV -38000 10603.45 17984.54 10314.59 902.579 NPV at 18% Year CE -38000 12300 24200 16100 PV factor 18% 1.0000 0.8475 0.7182 0.6086 NPV PV -38000 10423.73 17380.06 9798.957 -397.251 We have following formula for IRR: IRR lower rate+- +NPV +NPV-C-NPV) 902.57 Difference in rates -0.16+ 902.57-639725)*(0.18 -0.16) = 0.16 +0.6944x0.02) =17.39% Required return is 16.80%. Since IRR is greater than required return, this project should be accepted.