Bob’s Burgers is considering a project with an initial cost of $8 million that would produce...

Bob’s Burgers is considering a project with an initial cost of $8 million that would produce cash flows of $1.5 million the first year, $2 million the second, and $2.5 million per year for the final two years. If the required return is 11.3%, what is the IRR of the project?

Expert Solution

IRR refers to the rate of return at which NPV will be zero. In other words, at such a rate the company will not be able to produce any cash flows from the project in excess of cost of the investment.

Following is the formula for computation of IRR of the project as follows:

Following is the computation of IRR of the project as follows:

Thus the IRR of the project is 2.28% as per the given information. As the cost of capital of project is higher than IRR, then such project should not be chosen for investment.

jeff jeffy answered 9 months ago

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