A Firm Evaluates All Of Its Projects By Applying The Irr Rule.

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A Firm Evaluates All Of Its Projects By Applying The Irr Rule.

A project under consideration has the following cash flows: Year Cash Flow 0 -$ 27,200 1 11,200 2 14,200 3 10,200 If the required return is 16 percent, what is the IRR for this project? Should the firm accept the project? No Yes
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The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines the IRR for this project is: 0 = -$27,200 + $11,200 / (1 + IRR) + $14,200 / (1 + IRR)2 + $10,200 / (1 + IRR)3 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 14.96% Since the IRR is less than the required return, we would reject the project. CFo -$27,200 C01 $11,200 F01 1 C02 $14,200 F02 1 C03 $10,200 F03 1 IRR CPT 14.96%
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