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An investment costs $152,000 and has projected cash inflows of $71,800, $86,900, and −$11,200 for Years 1 to 3, respectively. If the required rate of return is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not?

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facundobuzzetti

Answer:

The project does not increase the value of the company.

Explanation:

Giving the following information:

An investment costs $152,000.

Cash inflows:

Year 1= $71,800

Year 2= $86,900

Year 3= −$11,200

The required rate of return is 15.5 percent

To determine whether the investment is convenient or not, we need to calculate the net present value. If the NPV is positive, the project is profitable.

NPV= -Io + ∑[Cf/(1+i)^n]

Cf= cash flow

Year 1= 71,800/1.155= 62,164.50

Year 2= 86,900/1.155^2= 65,141.21

Year 3= -11,200/1.155^3= -7,268.96

NPV= -152,000 + 62,164.50 + 65,141.21 - 7,268.96

NPV= -$31,963.25

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