Question

Suppose a project will provide an immediate cash inflow of $10,000. For each of the next 15 years it will generate a negative cash flow of $1,000. What is the project's IRR, and is the project worth undertaking if its opportunity cost is 8%?

Answer 1

- the project's IRR is 5.56%.

- the project is not worth undertaking because the IRR is lower than the cost of capital of 8%.

Step-by-step explanation:

Calculation of IRR of Project using a Financial Calculator :

$10,000 CFj

($1,000) CFj

15 Shift Nj

Shift IRR/YR 5.56%

We should always accept project that have an Internal rate of return higher than the Cost of Capital.

In our case, the IRR is lower than the opportunity cost of 8%, therefore the project is not worth undertaking.