Question

"Your company has a project available with the following cash flows:

Year 0= -80,600
Year 1= 21,750
Year 2= 25,500
Year 3= 31,300
Year 4= 26,250
Year 5= 20,300

If the required return is 15 percent, should the project be accepted based on the IRR?"

Answer 1

The question concerns the decision to accept a project based on IRR, but insufficient data is provided to calculate the IRR directly. Instead, we consider the required return to evaluate the cash flows and make the investment decision.

Step-by-step explanation:

The question relates to evaluating whether a company should accept a project based on its Internal Rate of Return (IRR) compared to the required return on investment. If the IRR of the project exceeds the company's required return of 15 percent, the project should be accepted. Calculating the IRR involves finding the discount rate that makes the net present value (NPV) of the cash flows from the investment equal to zero. However, the question does not provide enough information to directly calculate the IRR. Instead, it provides a series of cash flows and the required return. Without the IRR, one would typically calculate the NPV using the provided required return and compare it to the initial investment to make a decision.

The project's cash flows can be used to calculate the project's internal rate of return (IRR). The IRR is the discount rate that makes the net present value (NPV) of the project's cash flows equal to zero. To determine whether the project should be accepted based on the IRR, we need to compare it to the required return of 15 percent.