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Compute the IRR static for Project E. The appropriate cost of capital is 7 percent. (Do...

Compute the IRR static for Project E. The appropriate cost of capital is 7 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.)

    

  Project E
  Time: 0 1 2 3 4 5
  Cash flow –$2,000 $750 $780 $720 $500 $300

    

  IRR %

  

Should the project be accepted or rejected?
Accepted
Rejected

Solutions

Expert Solution

a. IRR 18.85%
b. Accepted
Working:
IRR is the rate at which Net Present Value is zero.
Calculate NPV at 7%
Time Cash flow Discount factor Present Value
0 $       -2,000      1.0000 $       -2,000
1 $            750      0.9346 $            701
2 $            780      0.8734 $            681
3 $            720      0.8163 $            588
4 $            500      0.7629 $            381
5 $            300      0.7130 $            214
Total $            565
Calculate NPV at 20%
Time Cash flow Discount factor Present Value
0 $       -2,000      1.0000 $       -2,000
1 $            750      0.8333 $            625
2 $            780      0.6944 $            542
3 $            720      0.5787 $            417
4 $            500      0.4823 $            241
5 $            300      0.4019 $            121
Total $             -55
IRR = 7%+(20%-7%)*(565/(565+55))
= 18.85%
Since IRR is more than cost of capital, project is to be Accepted.

jeff jeffy answered 1 year ago
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