The internal rate of return (IRR) for the given project is 19.48 percent. Therefore, the project should be accepted.
Internal rate of return (IRR) is the rate of interest at which the net present value of all the cash flows of a project is equal to zero. It is also referred to as the discounted cash flow rate of return. The decision rule for the internal rate of return is that if the calculated IRR is greater than the required rate of return (k), then the project should be accepted, but if the calculated IRR is less than the required rate of return (k), then the project should be rejected.
The following formula is used to calculate the internal rate of return (IRR) for a project: NPV = 0 = (CF1 / (1 + IRR)¹) + (CF2 / (1 + IRR)²) + (CF3 / (1 + IRR)³) + (CF4 / (1 + IRR)⁴)Where, CF1 = cash flow in the first year CF2 = cash flow in the second year CF3 = cash flow in the third year CF4 = cash flow in the fourth year To calculate IRR, we need to use trial and error method or excel. For this question, the calculated IRR is 19.48 percent. Since the calculated IRR is greater than the required rate of return (k) of 18%, the project should be accepted. Given, After-tax initial investment =$8146; CF1 =$1830; CF2 =$2850; CF3 =$3700; CF4 =$4990; k= 18% To find out the internal rate of return (IRR), we will use the trial and error method or Excel. Here, the calculated IRR is 19.48 percent. Since the calculated IRR is greater than the required rate of return (k) of 18%, the project should be accepted.