Question

Your factory has been offered a contract to produce a part for a new printer. The contract would last for three​ years, and your cash flows from the contract would be $5.01 million per year. Your upfront setup costs to be ready to produce the part would be $8.05 million. Your discount rate for this contract is 8.1%. a. What is the​ IRR? b. The NPV is $4.84 ​million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV​ rule?

Answer 1

IRR is the rate at which NPV = 0,

8.05 = 5.01/(1 + IRR) + 5.01/(1 + IRR)² + 5.01/(1 + IRR)³

Using Trial and Error,

IRR = 39.12%

as IRR> Discount rate and NPV > 0, project should be accepted