Question

The Steel Factory is considering a project that will produce annual cash flows of $43,800,$50,200, $46,200, and $51,800 over the next four years, respectively. If the initial cost of the project is $146,900, and the management requires a minimum 12.00% rate of return, should the firm accept this project based on its Internal Rate of Return (IRR)?

Answer 1

Ans IRR = 11.38%

ACCEPT the project since IRR is less than required minimum rate of return.

Year	Project Cash Flows (i)	DF@ 20%	DF@ 20% (ii)	PV of Project ( (i) * (ii) )	DF@ 10% (iii)	PV of Project ( (i) * (iii) )
0	-146900	1	1	(1,46,900)	1	(1,46,900)
1	43800	1/((1+20%)^1)	0.833333	36,500	0.909	39,818
2	50200	1/((1+20%)^2)	0.694444	34,861	0.826	41,488
3	46200	1/((1+20%)^3)	0.578704	26,736	0.751	34,711
4	51800	1/((1+20%)^4)	0.482253	24,981	0.683	35,380
		NPV	(23,822)	NPV	4,497
	IRR =	Ra + NPVa / (NPVa - NPVb) * (Rb - Ra)
		10% + 4497 / (4497+23822)*10%
		11.38%