You are considering an investment that costs $152,000 and has projected cash flows of $71,800, $86,900, and -$11,200 for years 1 to 3, respectively. If the required rate of return is 15.5 percent, should you accept the investment based solely on the internal rate of return rule

We can analyze the investment in the project by calculating the Net present value of the project. Net present value determines all today's value value of all net cash flows.

Net Present Value = [ ($152,00) x 1 ] + [ $71,800 x ( 1.155^-1 ) ] + [ $86,900 x ( 1.155^-2 ) ] + [ ($11,200) x ( 1.155^-3 ) ]

Net Present Value = ($152,00) + $62,165 + $65,141 + ($7,269) = ($31,963)

I should not accept the project because it is making a Negative net present value at required rate of return.

jepessoa jepessoa · Answer 2 · 2020-03-24T20:09:35+01:00

Answer:

this project should be rejected since the IRR is negative (-2.07%) and it is obviously less than the required rate of return

Explanation:

using an excel spreadsheet an the IRR function, we can calculate the internal rate of return (IRR) to be -2.07

besides the fact that no one should accept a project with a negative IRR, the comparison test tells us to decide compare the project's IRR with the required rate of return:

required rate of return (15.5%) > project's IRR (-2.07%)

we do not even need to calculate NPV since a negative IRR will always result in a negative NPV