Answer:
IRR (22%) is greater than the required rate of return of 8%, so we accept te project for implementation.
The project is good.
Explanation:
The IRR is the discount rate that equates the present value of cash inflows to that of cash outflows. At the IRR, the Net Present Value (NPV) of a project is equal to zero
If the IRR greater than the required rate of return , we accept the project for implementation
If the IRR is less than that the required rate , we reject the project for implementation
Lets calculate the IRR
Step 1: Use the given discount rate of 8% and work out the NPV
NPV = 24,000× (1-(1.08)^(-9))/0.08 ) - 110,000
= (24,000 × 6.2468) - 110,000
= 39,925.31
Step 2 : Use discount rate of 40% and work out the NPV (40% is a trial figure)
NPV = 24,000 × (1-(1.4)^(-9)/0.4) - 110,000
= (24,000 × 2.3789) - 110,000
= (52,904.02)
Step 3: calculate IRR
= 8% + ( (39,925.31/(39,925.31+52,904.02) )× (40%-8%)
= 22%
Step 4 : compare the IRR(22%) to 8% and make decision
IRR (22%) is greater than the required rate of return of 8%, so we accept the project for implementation.
That is the project is good.
