Question

A firm is considering a mining project with the following cash flows (with the final cash flow being negative, perhaps due to an extensive land reclamation in the project’s final year): C0 = –$280, C1 = $280, C2 = $308, C3 = $364, C4 = $280, and C5 = –$1036. (a) From among the following multiple-choice answers, calculate this project’s internal rate(s) of return: 5.070%, 25.225%, 33.333%, 51.909%, 82.425%. (2 pts.) (b) If the required return is 30.000%, should the project be rejected or accepted? Briefly, clearly justify and explain your reasoning. (2 pts.)

Answer 1

Solution :

(a) The project's Internal Rate of return = 5.070 %

Please find below the attached screenshot of the excel sheet containing the detailed calculation for the solution.

(b) As per the IRR Rule,

a. In case the IRR of the project is greater than its required rate of return, the project should be accepted.

b. In case the IRR of the project is lesser than its required rate of return, the project should not be accepted.

Since, the IRR of the project at 5.070 %, is lesser than its required rate of return at 30.000 %, the project should be rejected.

Thus, If the required return is 30.000%, should the project should be rejected.