## Corporate FInance Quiz Question 9

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

### Corporate FInance Quiz Question 9

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.
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 .

Tags:

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

### Re: Corporate FInance Quiz Question 9

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

Thanks Shreyas