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.
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.
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 find the discount rate that equates the present value of the cash inflows with the initial investment. Using a financial calculator or spreadsheet software, we can find that the IRR for this project is 23.18 percent, which is greater than the required rate of return of 8 percent. Therefore, the project should be accepted. The payback periods are irrelevant for this decision.

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