Question

Compute the IRR statistic for Project E. The appropriate cost of capital is 8 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.) Project E Time: Cash flow 0: $3,200 1: $950 2: $930 3: $820 4: $600 5: $400. IRR _______ % Should the project be accepted or rejected?

Answer 1

To compute the IRR for Project E, one must input the respective cash flows into a financial calculator or software capable of solving for IRR. The decision to accept or reject the project depends on whether the IRR is greater or less than the cost of capital, which is 8%.

Step-by-step explanation:

The subject question involves computing the Internal Rate of Return (IRR) for a given project and determining if the project should be accepted based on the IRR relative to the cost of capital. To calculate the IRR, we need to find the discount rate that makes the net present value (NPV) of all cash flows equal to zero.

The cash flows for Project E are as follows: Year 0: -$3,200, Year 1: $950, Year 2: $930, Year 3: $820, Year 4: $600, Year 5: $400. Using a financial calculator or software that can solve for IRR, input these cash flows and calculate the IRR. Since the market's cost of capital is 8%, if the IRR is higher than this rate, the project should be accepted, as it promises a return greater than the cost of capital. Conversely, if the IRR is less than 8%, the project should be rejected.

To determine if the Project E should be accepted, compare the calculated IRR with the given cost of capital, which is 8%. If IRR > 8%, accept the project, and if IRR < 8%, reject the project.