Suppose your firm is considering investing in a project with

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Time: 0 1 2 3 4 5 6 Cash flow: ?$5,000 $1,200 $2,400 $1,600 $1,600 $1,400 $1,200 Use the IRR decision rule to evaluate this project.

Solution

Let irr be x%
At irr,present value of inflows=present value of outflows.

5000=1200/1.0x+2400/1.0x^2+1600/1.0x^3+1600/1.0x^4+1400/1.0x^5+1200/1.0x^6

Hence x=irr=22.69%(Approx).

Hence since irr is greater than the required return;project must be accepted.