Question

Your factory has been offered a contract to produce a part for a new printer. The contract would last for 3 years and your cash flows from the contract would be $4.99 million per year. Your upfront setup costs to be ready to produce the part would be $8.16 million. Your discount rate for this contract is 8.4%.

A. What is the? IRR?
B. The NPV is $ 4.99 ?million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV?

Answer 1

Answer and Explanation:

The computation of the net present value and the internal rate of return is shown below:

After applying the excel formulas for NPV and IRR i.e.

For NPV = NPV()

For IRR = IRR(IRR)

The NPV and IRR is $4.61 million and 38% respectively

Since the NPV is in positive so the project should be accepted also the IRR would be agree with the NPV