Project Evaluation based on Internal Rate of Return

Should the company accept the project based on the given cash flows and required rate of return?

CF 0: -$49,000 / CF 1: $9,500 / CF 2: $26,200 / CF 3: $38,700

Final answer:

The company should accept the project because the project's rate of return is 19.47 percent, which is higher than the required rate of return of 18 percent.

Explanation:

To determine whether the company should accept the project, we need to calculate the internal rate of return (IRR) of the cash flows provided. The cash flows are as follows:

  • CF 0: -$49,000
  • CF 1: $9,500
  • CF 2: $26,200
  • CF 3: $38,700

We can use the IRR function in Excel or a financial calculator to calculate the IRR. By inputting the cash flows as negative and positive values, we find that the IRR of the project is approximately 19.47 percent.

Since the IRR of the project (19.47 percent) is higher than the required rate of return (18 percent), the company should accept the project. Therefore, the correct answer is option b. Yes; because the project's rate of return is 19.47 percent.

← Maximizing profit direct market or test marketing How to conduct a positive and optimistic audit →

More Posts: