An investment costs $152,000 and has projected cash inflows 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? Why or why not?
A) Yes; The IRR exceeds the required return.
B) Yes; The IRR is less than the required return.
C) No; The IRR is less than the required return.
D) No; The IRR exceeds the required return.
E) You should not apply the IRR rule in this case.

Question

Quizplus · Accepted Answer

The presence of both positive and negative cash flows (specifically the negative cash flow in Year 3) violates the assumption of reinvestment at the internal rate of return (IRR), making the IRR rule unreliable in this scenario.

An Investment Costs $152,000 and Has Projected Cash Inflows of $71,800