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Basic Question 29 of 29
Martin Computers is analyzing a project with the following cash flows:
B. 16.5%: Accept
C. 10.8%; Reject
CF0 = -256,000; CF1 = 56,000; CF2 = 85,000; CF3 = 125,000; CF4 = 67,000.
Martin's cost of funds is 14% for such a project. What is the IRR of the project? Should Martin accept the project?
A. 10.8%; Accept
B. 16.5%: Accept
C. 10.8%; Reject
User Contributed Comments 8
| User | Comment |
|---|---|
| HBomb | hi. anyone know how to do this without using a fin calc. i dont have one as yet. cheers. |
| myanmar | HBomb: to solve this problem without calc. is rather hard, you have to try with linear interpolation --> set the cash flow stream equal zero and try some IRR's until you get zero in this equation. |
| jessied | Or you can try to solve it by excel by setting cash flow stream and then inserting the function IRR in another cell. |
| 0is4eva | You know from the previous question that the present value was negative, that the project should be rejected. You also know that the cost of funds is 14%, and since the project should be rejected, the IRR must be lower than 14%. --> Two "reject"-choices, one with 16.5% and the other with 10.8% but only 10.8% is lower than 14%. Thus C, all other choices have been eliminated. You don't need a calculator to find the correct answer to this question. |
| 0is4eva | To HBomb and other in similar situation: Download simulator of HP12C on your computer, and use that for your calculations. There are links to simulators in the Forum. |
| fedha | using BA II INPUT ALL THE CF. Then access IRR RI =O CPT IRR |
| johntan1979 | Wrong logic by 0is4eva. It is NOT all the time the NPV rule agrees with the IRR rule. Don't simply assume. Work it out. Practice questions are not meant to make smart-***es out of you. |
| IatLs | HBomb, you could also use Excel. |
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Martin Rockenfeldt
Learning Outcome Statements
describe the capital allocation process, calculate net present value (NPV), internal rate of return (IRR), and return on invested capital (ROIC), and contrast their use in capital allocation
CFA® 2025 Level I Curriculum, Volume 2, Module 5.