Use the IRR decision rule to evaluate this project What is i

Use the IRR decision rule to evaluate this project. What is its IRR, and should this project be accepted or rejected? A) 54.22%, accept B) 32.12%, accept C) 28.69%, accept D) 28.69%, reject

Solution

IRR is the required rate at which NPV is 0, which means Sum of PV of Cash Inflows is equal to Sum of PV of Cash Outflows.

So,

Sum of PV of Cash Inflows = Sum of PV of Cash Outflows

$65,000/(1 + IRR)¹ + $78,000/(1 + IRR)² + $105,000/(1 + IRR)³ + $105,000/(1 + IRR)⁴ + $25,000/(1 + IRR)⁵ = $125,000

To solve this equation, we need to put the following values in the financial calculator:

CF0 = -125,000; C01 = $65,000; F01 = 1; C02 = 78,000; F02 = 1; C03 = 105,000; F03 = 2; C04 = 25,000; F04 = 1;

Press IRR, then CPT; which gives us 54.22%

According to the IRR decision rule, the project should be accepted if IRR>Required Rate of Return.

Hence, The project should be accepted as IRR(54.22%) > Required Rate of Return(12%).