Question

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 –$1,400 $510 $600 $600 $380 $180

Should the project be accpeted or rejected?

Answer 1

1)	IRR		22.39%
2)	Project has IRR more than cost of capital.So, it should be accepted.
Working:
IRR is the rate at which Net Present Value of project is zero.
a.	Calculation of Net Present Value(NPV) at 7%
	Year	Cash flow	Discount factor	Present Value
	0	$       -1,400	1.0000	$ -1,400.00
	1	$            510	0.9346	$      476.64
	2	$            600	0.8734	$      524.06
	3	$            600	0.8163	$      489.78
	4	$            380	0.7629	$      289.90
	5	$            180	0.7130	$      128.34
		Total		$      508.72
NPV and discount rate has inverse relation.If Discount rate increases, NPV decreses and vice versa.
So, IRR must be more than 7% to get NPV Zero.
b.	Calculation of Net Present Value(NPV) at 25%
	Year	Cash flow	Discount factor	Present Value
	0	$       -1,400	1.0000	$ -1,400.00
	1	$            510	0.8000	$      408.00
	2	$            600	0.6400	$      384.00
	3	$            600	0.5120	$      307.20
	4	$            380	0.4096	$      155.65
	5	$            180	0.3277	$         58.98
		Total		$       -86.17
IRR	=	7%+(25%-7%)*(508.72/(508.72+86.17))
	=	22.39%
This is an approximation method.So, It mat not be exact IRR but approximate to exact IRR.