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Nu Things, Inc., is considering investing in a business venture with the following anticipated cash flow results:

EOY Cash Flow

0 -$70,000
1 $20,000
2 $19,000
3 $18,000
4 $17,000
5 $16,000
6 $15,000
7 $14,000
8 $13,000
9 $12,000
10 $11,000
11 $10,000
12 $9,000
13 $8,000
14 $7,000
15 $6,000
16 $5,000
17 $4,000
18 $3,000
19 $2,000
20 $1,000

Assume MARR is 20 percent per year. Based on an internal rate of return analysis:

Determine the investment.

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Answer:

  • 22.27%
  • Company should invest in project.

Explanation:

Input the numbers given into an Excel worksheet to find the Internal Rate of Return in the manner shown in the attachment.

The investment will have to be in negative.

The IRR will come out as 22.27%

When evaluating a project based on IRR, invest in the project if the project MARR is less than the IRR as is the case here so the company should invest in this project, all else equal.

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