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. $$\begin{array} { | l | c | c | l | l | }
\hline \text { Time } & 0 & 1 & 2 & 3 \
\hline \text { Project A Cash Flow } & - 5,000 & 1,000 & 3,000 & 5,000 \
\text { Project B Cash Flow } & - 10,000 & 5,000 & 5,000 & 5,000 \
\hline
\end{array}$$
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

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. $$\begin{array} { | l | c | c | l | l | } 
\hline \text { Time } & 0 & 1 & 2 & 3 \
\hline \text { Project A Cash Flow } & - 5,000 & 1,000 & 3,000 & 5,000 \
\text { Project B Cash Flow } & - 10,000 & 5,000 & 5,000 & 5,000 \
\hline
\end{array}$$
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

Quizplus · Accepted Answer

To use the IRR decision rule, we need to calculate the internal rate of return for each project and compare it with the required rate of return of 12%.

For Project A:

IRR = 20.00%

Since the IRR of Project A is greater than the required rate of return, we should accept Project A.

For Project B:

IRR = 20.00%

Since the IRR of Project B is greater than the required rate of return, we should accept Project B.

Therefore, we should accept both projects A and B.

Suppose Your Firm Is Considering Two Independent Projects with the Cash