A firm considers a project with the following cash flows: time-zero = +20,000, years 1-5 = -4,500.Should the project be accepted if the cost of capital is 10 percent?
A)Yes, the IRR of the project is 4.06 percent.
B)Yes, the IRR of the project is 12.5 percent.
C)No, the IRR of the project is 4.06 percent.
D)No, the IRR of the project is 12.5 percent.

Question

Quizplus · Accepted Answer

IRR is calculated as the discount rate that makes the NPV of a project equal to zero. In this case, the NPV is calculated as follows:NPV = -20,000 + (-4,500 / 1.10) + (-4,500 / 1.10^2) + (-4,500 / 1.10^3) + (-4,500 / 1.10^4) + (-4,500 / 1.10^5) = -20,000 + (-4,090.91) + (-3,718.10) + (-3,389.27) + (-3,099.34) + (-2,835.76) = -37,133.38Since the NPV is negative, the project should not be accepted.

A Firm Considers a Project with the Following Cash Flows