Corporate FInance Quiz Question 9

varsha.rajpurohit
Posts: 9
Joined: Thu Sep 06, 2012 10:08 am

Corporate FInance Quiz Question 9

Postby varsha.rajpurohit » Thu Sep 06, 2012 10:26 am

The question states:
A project’s initial cost is $100 million, and the required rate of return is 10%. Following is the cash inflow for subsequent years:
Year 1: $ 20 million
Year 2: $ 50 million
Year 3: $ 40 million
The financing cost for the project is 4%. Calculate the IRR and determine whether we should accept or reject the project.
Choose one answer.
a. 4.48%, Reject
b. 4.48%, Accept
c. -4.48%, Reject

The correct answer given is 4.48%, Reject.

As per my understanding the answer should have been 4.48%, Accept as the IRR is greater than the Financing Cost for the Project.Could someone please explain this .

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shreyas
Finance Junkie
Posts: 83
Joined: Thu Jul 19, 2012 6:49 pm

Re: Corporate FInance Quiz Question 9

Postby shreyas » Mon Sep 10, 2012 4:19 pm

We take the required rate of return on the project and not the financing cost. The IRR is 4.48% which is less than the required rate of return of 10%. Hence we reject the project.

varsha.rajpurohit
Posts: 9
Joined: Thu Sep 06, 2012 10:08 am

Re: Corporate FInance Quiz Question 9

Postby varsha.rajpurohit » Mon Sep 10, 2012 4:27 pm

Thanks Shreyas


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