Question

A project has cash flows of -$1,000. -$2,000, +$3,000, and +$4,000 in consecutive years. Your cost of capital is 30% per annum. Use the IRR rule to determine whether you should take this project and compare this result and approach with the net present value method.

My answer: please check

1. A project has cash flows of -$1,000. -$2,000, +$3,000, and +$4,000 in consecutive years. Your cost of capital is 30% per annum. Use the IRR rule to determine whether you should take this project and compare this result and approach with the net present value method.

Answer: The IRR for the project above is 56.00% which is higher than the huddle rate of 30.00%. The NPV is negative 999.00, hence, we shouldn’t take this project forward.

Cash flows	($1,000)	($2,000)	$3,000	$4,000
	56%	IRR
	30.00%	Cost of Cap.
	($999.00)	NPV

Answer 1

Calculation of NPV and IRR:

Formula View:

Decision:

If we consider IRR then it is 56% which is above my required rate of return i.e. 30% and we should accept project.

However, if we consider NPV then it is + $1,057.35 and since NPV is POSITIVE we should accept the Project.

In the given case decision through NPV and IRR is same and there is no conflict hence we should accept the project

However, if there is any conflict between NPV and IRR Method then Decision through NPV will ALWAYS prevails over decision through IRR

Suggestion:

Kindly check the calculation of NPV in your answer since it is +1057.35 in my answer.

Note: "If you have any Query/Suggestions, feel free to ask me in the comment box."