Question

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? Why or why not?

a. Yes; The IRR exceeds the required return.
b. No; The IRR exceeds the required return.
c. You cannot apply the IRR rule in this case.
d. Yes; The IRR is less than the required return.

Answer 1

c

Step-by-step explanation:

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested

The IRR would give conflicting answers in this case because a stream of positive cash flows is followed by negative cash flow

IRR can only be used when a negative cash flow is followed by positive cash flows

In this question there are two negative cash flows in year 0 and year 3