You are considering an investment that costs $152,000 and has projected cash flows of $71,800, $86,900, and - $11,200 for years 1 to 3, respectively. If the required rate of return is 15.5 percent, should you accept the investment based solely on the internal rate of return rule

Question

Tia Middleton

Business

11 March, 00:07

You are considering an investment that costs $152,000 and has projected cash flows of $71,800, $86,900, and - $11,200 for years 1 to 3, respectively. If the required rate of return is 15.5 percent, should you accept the investment based solely on the internal rate of return rule

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Answers (1)

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Antony Casey · Answer 1

this project should be rejected since the IRR is negative (-2.07%) and it is obviously less than the required rate of return

Explanation:

using an excel spreadsheet an the IRR function, we can calculate the internal rate of return (IRR) to be - 2.07

besides the fact that no one should accept a project with a negative IRR, the comparison test tells us to decide compare the project's IRR with the required rate of return:

required rate of return (15.5%) > project's IRR (-2.07%)

we do not even need to calculate NPV since a negative IRR will always result in a negative NPV