Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively. $$\begin{array} { l l l l l l l }
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - 100,000 & 30,000 & 45,000 & 55,000 & 30,000 & 10,000
\end{array}$$ Use the IRR decision rule to evaluate this project; should it be accepted or rejected?
A)-4.95 percent, reject
B)4.95 percent, accept
C)-23.18 percent, reject
D)23.18 percent, accept

Question

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistic for the project are three and three and a half years, respectively. $$\begin{array} { l l l l l l l } 
\text { Time } & 0 & 1 & 2 & 3 & 4 & 5 \
\text { Cash Flow } & - 100,000 & 30,000 & 45,000 & 55,000 & 30,000 & 10,000
\end{array}$$ Use the IRR decision rule to evaluate this project; should it be accepted or rejected?
A)-4.95 percent, reject
B)4.95 percent, accept
C)-23.18 percent, reject
D)23.18 percent, accept

Quizplus · Accepted Answer

To evaluate the project using the IRR decision rule, we need to calculate the internal rate of return (IRR) of the project and compare it to the required rate of return (RRR). If the IRR is greater than the RRR, the project should be accepted, and if it is less than the RRR, the project should be rejected.

Using a financial calculator or spreadsheet software, we can find that the IRR of this project is approximately 23.18 percent. Since the IRR is greater than the RRR of 8 percent, the project should be accepted.

Therefore, the best choice is D: 23.18 percent, accept.

Suppose Your Firm Is Considering Investing in a Project with the Cash