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Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the internal rate of return (IRR) that Jamaica can earn on this project and should the project be accepted? (Round to the nearest percent)?

Respuesta :

Answer:

IRR is 19.87% and project should be accepted.

Explanation:

Given:

Cost of assembly line = $8,500,000

Cash inflow in year 1 = $2,000,000

Cash inflow in year 2 = $3,000,000

Cash inflow in year 3 = $4,000,000

Cash inflow in year 4 = $5,000,000

Cost of capital = 16%

IRR can be computed using spreadsheet function =IRR(values)

Cost of assembly line is written with negative sign as it is a cash outflow.

IRR of project is 19.87%

Since the cost of capital is 16% while rate of return is 19.87% (higher than the cost), project should be accepted.

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