Question

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:

   

Year	Cash Flow
0	–$	27,100
1		11,100
2		14,100
3		10,100

  

1．If the required return is 15 percent, what is the IRR for this project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

IRR

%

  

２．Should the firm accept the project?

No Yes

Answer 1

IRR is less than required rate 15%, so project will be rejected.

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We need to calculate IRR for this project and then compare it with require rate of return (15%).

If IRR is greater than required return the project will be accepted, else rejected.

Internal rate of return is the rate at which if we discount all the future cash flows, the resulting NPV will be zero, it is minimum rate of return that management seeks from the project, IRR of the asset/project must be greater than the required rate of return, otherwise it will not be feasible for the management to accept the project. Best way to calculate IRR is using Excel.

Year	Cash flow
0	-27100
1	11100
2	14100
3	10100
IRR	14.67%
Formula	=IRR(J21:J31)

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