Question

3. You are considering an investment for which you require at least a 3.6 percent rate of return. The investment will cost $87,000 and produce cash inflows of $12,500 a year for 8 years. Should you accept this project based on its internal rate of return? Why or why not?
a. yes; because the IRR is 5.21 percent
b. yes; because the IRR is 4.79 percent
c. yes; because the IRR is 3.68 percent
d. no; because the IRR is equal to 3.20 percent
e. no; because the IRR is 2.86 percent

Answer 1

Let irr be x%
At irr,present value of inflows=present value of outflows.

87000=12500/1.0x+12500/1.0x^2+12500/1.0x^3+................+12500/1.0x^8

Hence x=irr=3.20%(Approx).

Hence since irr is less than required return;project must not be accepted.(Option D).