Question

You are considering an investment in a clothes distributer. The company needs $ 102 comma 000 today and expects to repay you $ 125 comma 000 in a year from now. What is the IRR of this investment​ opportunity? Given the riskiness of the investment​ opportunity, your cost of capital is 10 %. What does the IRR rule say about whether you should​ invest?

Answer 1

You Should invest

Step-by-step explanation:

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

103,000 =130,000/(1.0x)

Or x= 26.214%

Hence the IRR of this investment opportunity is 26.2% (approx)

Cost of Capital = 12%

The IRR rule says that one must accept. This is because the IRR is greater than the cost of capital.

Hence the correct answer is : should invest