# A firm evaluates all of its projects by applying the IRR rule. If the required return is 18%,...

## Question:

A firm evaluates all of its projects by applying the IRR rule. If the required return is 18%, should the firm accept the following project?

Year - Cash Flow
0 - $28,000 1 -$12,700
2 - $15,890 3 -$8,230

## Internal Rate of Return:

Internal rate of return (IRR) is the rate at which the present value of all the cash inflows of a project is equal to the initial investment. In other words, IRR is the rate at which NPV = 0. It is one of the selection criteria of a project. The form accepts the project if IRR is greater than the required rate of return.

The firm should not accept the project.

• Initial investment = $28,000 • Cash flow in year 1 =$12,700
• Cash flow in year 2 = $15,890 • Cash flow in year 3 =$8,230

Let the IRR be r

{eq}\$28,000 = \frac{12,700}{(1 + r)^1} + \frac{15,890}{(1 + r)^2} + \frac{8,230}{(1 + r)^3}\\ r = 16.07\% {/eq}

Required rate of return = 18%

As the IRR of the project is less than the required rate of return, the firm should not accept the project.