Question

Tressor company is considering a 5-year project. the company plans to invest $90,000 now and it forecasts cash flows for each year of $27,000. the company requires that investments yield a discount rate of at least 14%. selected factors for a present value of an annuity of 1 for five years are shown below:

Answer 1

Interest rate Present value of an annuity

of $1 factor for year 5

10% 3.7908

12% 3.6048

14% 3.4331

Calculate the internal rate of return to determine whether it should accept this project.

The project should be accepted because it will earn more than 14%.

The project should be accepted because it will earn more than 10%.

The project will earn more than 12% but less than 14%. At a hurdle rate of 14%, the project should be rejected.

The project should be rejected because it will earn less than 14%.

The project should be rejected because it will not earn exactly 14%.

Answer : The IRR of the project is 15.24%.

The project should be accepted since it will earn more than 14%.

The NPV at 10% is $ 12351.6

The NPV at 12% is $7329.6

The NPV at 14% is 2693.7

Since NPV is positive at 14%, we may safely conclude that the IRR of the project is greater than 14%.

The NPV at 15% is 90,508.19

The NPV at 16% is 88,405.93

By interpolation, we can determine that the IRR of the project is 15.24%.