Suppose an investment will have an initial positive cash flow of $100,000 in year 0, followed by a negative cash flow of $110,000 in period 1. Thus, the IRR of the project is 10%. Should we accept or reject the project if the required return is 15%?

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Business

Abbey Hayden

7 June, 06:46

Suppose an investment will have an initial positive cash flow of $100,000 in year 0, followed by a negative cash flow of $110,000 in period 1. Thus, the IRR of the project is 10%. Should we accept or reject the project if the required return is 15%?

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Answers (1)

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Leland Friedman · Answer 1

Answer: Reject the Project

Explanation:

If the required return (also known as hurdle rate) is 15% (which is above the Internal Rate of Return of 10%) then the project or investment is less profitable.

The required return is the minimum return that will repay initial investment and other input.

Since the actual or eventual rate of return (IRR) is less than this required minimum, the project should be rejected.

On the other hand, if the investor has no alternative project to invest in or if the investor no time constraints, he or she can wait to see the Internal Rate of Return in succeeding periods or years like Period 2, Period 3, etcetera.