Question

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent.

Time:	0	1	2	3	4	5	6
Cash flow:	–$8,600	$1,080	$2,280	$1,480	$1,480	$1,280	$1,080

Use the IRR decision rule to evaluate this project. (Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places.)

IRR%=

Should it be accepted or rejected?

Answer 1

IRR :
IRR is the Rate at which PV of Cash Inflows are equal to PV of Cash Outflows.

IRR = Rate at which least +ve NPV + [ NPV at that Rate / Change in NPV due to 1% inc in disc rate ] * 1%

If IRR > Cost of Capital - Project can be accepted
IRR = Cost of Capital - Indifferebce Point - Project will be accepted / Rejected
IRR < Cost of Capital - Project will be erejected

Year	CF	PVF @0%	Disc CF	PVF @1%	Disc CF
0	$ -8,600.00	1.0000	$ -8,600.00	1.0000	$ -8,600.00
1	$ 1,080.00	1.0000	$ 1,080.00	0.9901	$ 1,069.31
2	$ 2,280.00	1.0000	$ 2,280.00	0.9803	$ 2,235.07
3	$ 1,480.00	1.0000	$ 1,480.00	0.9706	$ 1,436.47
4	$ 1,480.00	1.0000	$ 1,480.00	0.9610	$ 1,422.25
5	$ 1,280.00	1.0000	$ 1,280.00	0.9515	$ 1,217.88
6	$ 1,080.00	1.0000	$ 1,080.00	0.9420	$ 1,017.41
NPV	$        80.00		$    -201.61

IRR = Rate at which least +ve NPV + [ NPV at that rate / Change in NPV due to Inc of 1% in Int Rate ] * 1%

= 0.00 + [80.00 / 281.61] * 1%

= 0.00 + [0.28 ] * 1%

= 0.00 + [0.0028]

= 0.0028 i.e 0.28%

As IRR(0.28%) < Cost of Capital ( 8%), Project is Rejected.

Pls do rate, if the answer is correct and comment, if any further assistance is required.