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 $ 5.08 million per year. Your upfront setup costs to be ready to produce the part would be $ 8.08 million. Your discount rate for this contract is 8.5 %.
a. What is the IRR?
b. The NPV is $ 4.89 million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV rule?
a.Let irr be x%
At irr,present value of inflows=present value of outflows.
8.08=5.08/1.0x+5.08/1.0x^2+5.08/1.0x^3
Hence x=irr=39.92%(Approx).
b.Hence since irr is greater than discount rate;project should be accepted as per irr rule
Hence irr rule agrees with NPV rule.
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