Question

modern refurbishing inc. is considering a project that has the following cash flow data. What is the project IRR? Note that a projects IRR can be less than the cost of capital (and even negative, In which case will it be rejected.

Year 0 1 2 3

CF -$900 $330 %315 $300 $270

Answer 1

Answer:

We will calculate IRR using interpolation method

Year	CF	PV at 12%	Discounted Cash flows
0	-900.00	1	-900.00
1	330.00	0.8929	294.66
2	315.00	0.7972	251.12
3	300.00	0.7118	213.54
4	270.00	0.6355	171.59
			30.90

Year	CF	PV at 16%	Discounted Cash flows
0	-900.00	1	-900.00
1	330.00	0.8621	284.49
2	315.00	0.7432	234.11
3	300.00	0.6407	192.21
4	270.00	0.5523	149.12
			-40.07

Now, IRR =Start rate+(NPV at start rate / NPV at start rate - NPV at end rate) X Difference between rate.

IRR = 12 + (30.90 / 30.90+40.07) * 4
IRR = 13.74%

Since the cost of capital is not given in the question, we could not comment whether the project should be accepted or rejected.
As per IRR rule, the project should be accepted if the IRR is greater than the cost of the capital.