A firm evaluates all of its projects by applying the IRR rule. Year Cash Flow 0 –$ 158,000 1 58,000 2 81,000 3 65,000

A firm evaluates all of its projects by applying the IRR rule.

Year	Cash Flow
0	–$	158,000
1		58,000
2		81,000
3		65,000

Requirement 1:

What is the project's IRR? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Internal rate of return

%

Requirement 2:

If the required return is 15 percent, should the firm accept the project?

No

Explanation:

1:

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 = – $158,000 + $58,000 / (1 + IRR) + $81,000 / (1 + IRR)2 + $65,000 / (1 + IRR)3

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:

IRR = 13.66%

2:

Since the cash flows are conventional and the IRR is lower than the required return, we would not accept the project.

   

Calculator Solution:

Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

  

CFo	–$158,000
C01	$58,000
F01	1
C02	$81,000
F02	1
C03	$65,000
F03	1
IRR CPT
13.66%