Should The Flour Baker Accept the Project Based on Internal Rate of Return?
Should The Flour Baker Accept the Project Based on Internal Rate of Return if the Required Return is 18 percent?
Based on the data provided, what is the project's rate of return and should it be accepted?
A. Yes; because the project's rate of return is 7.78 percent
B. Yes; because the project's rate of return is 16.08 percent
C. Yes; because the project's rate of return is 19.47 percent
D. No; because the project's rate of return is 19.47 percent
E. No; because the project's rate of return is 16.08 percent
Answer:
The project should not be accepted based on its internal rate of return.
The internal rate of return (IRR) is the rate at which the present value of the project's cash inflows equals the present value of its cash outflows. To determine if the project should be accepted based on IRR, we compare it to the required return (also known as the hurdle rate). In this case, the required return is 18 percent. The project's IRR is 7.78 percent, which is lower than the required return. Therefore, the project should not be accepted based on its internal rate of return.