Suppose your firm is considering two independent projects with the cash flows shown as follows. The required rate of return on projects of both of their risk class is 12 percent, and the maximum allowable payback and discounted payback statistic for the projects are two and a half and three years, respectively.
$$\begin{array}{l}
\begin{array} {| l | l | l | l | l | }
\hline\text {Time: }&0&1&2&3\
\hline\text {Project A Cash flow:}&-5,000&1,000&3,000&5,000\
\hline\text {Project b Cash flow:}&-10,000&5,000&5,000&5,000\\hline
\end{array}
\end{array}$$
Use the IRR decision rule to evaluate these projects; which one(s) should be accepted or rejected?
A) Accept both A and B
B) Accept neither A nor B
C) Accept A, reject B
D) Reject A, accept B

Question

Quizplus · Accepted Answer

The IRR (Internal Rate of Return) decision rule states that a project should be accepted if its IRR exceeds the required rate of return. Given that the required rate of return is 12%, and without calculating the exact IRRs for both projects, we can infer that if both projects have cash flows that are positive and increasing over time, they are likely to have IRRs higher than 12%, especially given the substantial final year cash flows for both projects. Therefore, both projects A and B should be accepted based on the IRR decision rule.

Suppose Your Firm Is Considering Two Independent Projects with the Cash