A project has a total up-front cost of $435.44. The cash flows are $100 in the first year, $200 in the second year, and $300 in the third year. What’s the IRR? If we require an 18 percent return, should we take this investment?

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Accepted Answer

We’ll describe the NPV profile and find the IRR by calculating some NPVs at different discount rates. You should check our answers for practice. Beginning with 0 percent, we have:

NPV	Discount Rate
$164.56	0%
100.36	5
46.15	10
0.00	15
-39.61	20

The NPV is zero at 15 percent, so 15 percent is the IRR. If we require an 18 percent return,then we should not take the investment. The reason is that the NPV is negative at 18 percent (verify that it is -$24.47). The IRR rule tells us the same thing in this case. We shouldn’t take this investment because its 15 percent return is below our required 18 percent return.

Question 9.4: A project has a total up-front cost of $435.44. The cash flo...

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