The Flour Baker is considering a project with the following cash flows. Should this project be accepted based on its internal rate of return if the required return is 11 percent?
A) Yes; the project's rate of return is 7.78 percent
B) Yes; the project's rate of return is 9.36 percent
C) No; the project's rate of return is 7.78 percent
D) No; the project's rate of return is 9.36 percent
E) No; the project's rate of return is 13.08 percent

Question

The Flour Baker is considering a project with the following cash flows. Should this project be accepted based on its internal rate of return if the required return is 11 percent? 
A) Yes; the project's rate of return is 7.78 percent 
B) Yes; the project's rate of return is 9.36 percent 
C) No; the project's rate of return is 7.78 percent 
D) No; the project's rate of return is 9.36 percent 
E) No; the project's rate of return is 13.08 percent

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR) of the project, we need to find the discount rate that makes the net present value (NPV) of the project equal to zero. Using the required return of 11%, we discount the cash flows and calculate the NPV to be - $7,257.27. We then try different discount rates until we find the rate that makes the NPV equal to zero. In this case, the IRR is 7.78%, which is lower than the required return of 11%. Therefore, the project should be rejected as it is not expected to generate returns higher than the required return.

The Flour Baker Is Considering a Project with the Following