Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l | l | l |}
\hline\text {Time: }&0&1&2&3&4&5\
\hline\text {Cash flow:}&-75&-75&0&100&75&50\\hline
\end{array}
\end{array}$$
A) 10 percent, accept
B) 10 percent, reject
C) 13.26 percent, accept
D) 13.26 percent, reject

Question

Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l |  l |  l |}
\hline\text {Time: }&0&1&2&3&4&5\
\hline\text {Cash flow:}&-75&-75&0&100&75&50\\hline
\end{array}
\end{array}$$
A) 10 percent, accept
B) 10 percent, reject
C) 13.26 percent, accept
D) 13.26 percent, reject

Quizplus · Accepted Answer

The IRR (Internal Rate of Return) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. To find the IRR for Project X, we would need to solve the equation for the rate $r$ that makes the NPV equal to zero:$$-75 - 75(1 + r)^{-1} + 100(1 + r)^{-3} + 75(1 + r)^{-4} + 50(1 + r)^{-5} = 0$$This equation cannot be solved algebraically without a financial calculator or software designed for financial analysis. Assuming the calculation has been done and the IRR is found to be 13.26 percent, we compare this to the firm's cost of capital. If the IRR is greater than the cost of capital (10 percent in this case), the project is expected to generate a return higher than the cost of the funds used to finance it, and therefore, the firm should accept the project.

Compute the IRR Statistic for Project X and Note Whether