A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:

Problem 9-7 Calculating IRR [LO5]
A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows:
  
Year    Cash Flow
0    –$    28,400   
1         12,400   
2         15,400   
3         11,400   
________________________________________
 
If the required return is 15 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Should the firm accept the project?

•   
No
•   
Yes
Explanation
Note: Intermediate answers are shown below as rounded, but the full answer was used to complete the calculation.

The IRR is the interest rate that makes the NPV of the project equal to zero. So, the equation that defines the IRR for this project is:

0 = –$28,400 + $12,400/(1 + IRR) + $15,400/(1 + IRR)2 + $11,400/(1 + IRR)3

Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that:

IRR = 18.24%

Since the IRR is greater than the required return, we would accept the project.
 
Calculator Solution:

CFo	–$28,400
C01	$12,400
F01	1
C02	$15,400
F02	1
C03	$11,400
F03	1
IRR CPT
18.24%

Thank you!