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Your factory has been offered a contract to produce a part for a new printer. The contract would last for three​ years, and your cash flows from the contract would be $ 4.91 million per year. Your upfront setup costs to be ready to produce the part would be $ 7.96 million. Your discount rate for this contract is 7.5 %.

Required:
a. What is the​ IRR?
b. The NPV is $ 4.68$4.68 ​million, which is positive so the NPV rule says to accept the project. Does the IRR rule agree with the NPV​ rule?

Respuesta :

Answer:

IRR = 38.43%

Yes, they agree

Explanation:

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

IRR can be calculated using a financial calculator.

Cash flow in year 0 = $-7.96 million.

Cash flow each year from year 1 to 3 = 4.91 million

IRR = 38.43%

A project should be undertaken if the IRR of the project is greater than its discount rate. The IRR of this project is greater than the IRR, so the project should be carried out.

The IRR rule and NPV rule agree

To find the IRR using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.

I hope my answer helps you

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