Question

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: points Year Cash Flow 0 29.000 13,000 16.000 12.000 eBook References If the required return is 15 percent. what is the IRR for this project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g. 32.16.) IRR % Should the firm accept the project?

Answer 1

IRR of a project is the rate for which the NPV is zero

NPV of a project is the sum of the present value of all future cashflows

C0: -$29000, C1: 13000, C2: +$16000, C3: +12000

NPV = C₀ + C₁/(1+irr) + C₂/(1+irr)² + C₃/(1+irr)³

Method 1: IRR calculation using Excel

IRR can be calculated using IRR Function in excel as shown below:

=IRR(B2:B5) = 19.75%

B6 - X V fx =IRR(B2:35) C D E A B 1 Year Cashflow 20 w No -29000 13000 16000 12000 19.75% 6 IRR

Answer -> IRR = 19.75%

Method 2: Using ba ii plus calculator

CF0 = -29000

C01 = 13000, F01 = 1

C02 = 16000, F02 = 1

C03 = 12000, F03 = 1

IRR -> CPT (Press IRR and then press CPT)

We get, IRR = 19.75

Answer -> Project's IRR = 19.75%

IRR Rule - As per the IRR rule, the project should be accepted if the IRR is greater than the required rate of return

Required rate of return = 15%

IRR = 19.75%

IRR > Required rate of return. So, the firm should accept the project

Answer

IRR = 19.75%

Yes, the firm should accept the project