You are considering an investment in a clothes distributer. The company needs $ 110 comma 000 today and expects to repay you $ 121 comma 000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 17 %. What does the IRR rule say about whether you should invest?

Question

Lydia Zhang

Business

16 May, 12:36

You are considering an investment in a clothes distributer. The company needs $ 110 comma 000 today and expects to repay you $ 121 comma 000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 17 %. What does the IRR rule say about whether you should invest?

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Uriah Miller · Answer 1

The IRR of this investment opportunity is 10%

The IRR rule says that you should not invest

Explanation:

To calculate the IRR of this investment opportunity we shall calculate the following:

Let the IRR be x.

Now, Present Value of Cash Outflows=Present Value of Cash Inflows

110,000 = 121,000 / (1.0x)

x = 10%

Hence, the IRR of this investment opportunity is 10%

Cost of Capital = 17%

The IRR rule says that one must not accept. This is because the IRR is lower than the cost of capital.

Hence you should not invest