Ask Question
20 July, 12:12

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?

0
Answers (1)
  1. 20 July, 13:07
    0
    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
Know the Answer?