Project Evaluation Using IRR and NPV Rule

Should the Firm Accept the Project Based on IRR and NPV Rule?

a) If the required return is 18%?

b) If the required return is 11%?

c) If the required return is 23%?

Answers

a) No, the firm should not accept the project at a required return of 18% according to IRR rule.

b) Yes, the firm should accept the project at a required return of 11%.

c) No, the firm should not accept the project at a required return of 23%.

When using the internal rate of return (IRR) rule, the firm should compare the calculated IRR to the required return to make a decision on whether to accept or reject the project. If the IRR is greater than the required return, the project should be accepted.

At a required return of 18%, the calculated IRR for the project is approximately 15.45%, which is lower than the required return. Therefore, the firm should not accept the project at this required return based on the IRR rule.

On the other hand, when using the net present value (NPV) decision rule, the firm should assess whether the NPV of the project is positive at the required return to determine acceptance. A positive NPV suggests that the project's cash inflows exceed the initial investment.

At a required return of 11%, the calculated NPV for the project is approximately $14,314, indicating a positive NPV. Thus, the firm should accept the project at this required return based on the NPV rule.

However, if the required return increases to 23%, the calculated NPV for the project becomes approximately -$5,900. This negative NPV implies that the project's cash inflows do not exceed the initial investment sufficiently at the higher required return.

Therefore, the firm should not accept the project at a required return of 23% according to the NPV rule.