Question

Marielle Machinery Works forecasts the following cash flows on a project under consideration. It uses the internal rate of return rule to accept or reject projects. C0 C1 C2 C3 −$11,600 0 +$9,100 +$10,100 a. What is the project’s IRR? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. Should this project be accepted if the required return is 12%?

Answer 1

-11,600

+9,100/1+IRR

+ 10,100/(1+IRR)^2

=0

11,600=9100/(1+IRR)+10,100/(1+IRR)^2

IRR= 0.404= 40.4%

If the required rate of return is 12% the project should be accepted because it is lower than the IRR. This means that the return that the investors require from the project is lower than what the project actually returns, so when actual returns are more than required returns we should accept the project

Step-by-step explanation:

Set NPV to 0 in order to find the IRR, IRR is the rate at which the future cash flows are discounted and then the original payment is subtracted from them, so that the npv comes to be 0