Meyer, Inc. is considering a very risky five-year project that has an

Meyer, Inc. is considering a very risky five-year project that has an initial outlay or cost of $70,000. The future cash inflows from its project for years 1, 2, 3, 4, and 5 are all the same at $35,000.

Meyer uses the internal rate of return method to evaluate projects. Will Meyer accept the project if its hurdle rate is 41.00%?
A) Meyer will probably reject this project because its IRR is about 39.74%, which is slightly below its hurdle rate.
B) Meyer will probably accept this project because its IRR is about 41.04%, which is slightly above its hurdle rate.
C) Meyer will accept this project because its IRR is about 41.50%.
D) Meyer will accept this project because its IRR is over 45.50%.

ANSWER

Answer: B
Explanation: B) Using a financial calculator or software program like Excel or trial and error (and rounding our answer to two decimal places), we get IRR = 41.04%. Thus, it appears that Meyer will accept this project since Meyer’s hurdle rate of 41.00% is slightly less than the project’s IRR of 41.04%.