Washington Industries Inc. is considering a project that has an initia

Washington Industries Inc. is considering a project that has an initial after-tax outlay or after-tax cost of $350,000. The respective future cash inflows from its five-year project for years 1 through 5 are $75,000 each year.

Washington expects an additional cash flow of $50,000 in the fifth year. The firm uses the IRR method and has a hurdle rate of 10%. Will Washington accept the project?
A) Washington accepts the project because it has an IRR greater than 10%.
B) Washington rejects the project because it has an IRR less than 10%.
C) Washington accepts the project because it has an IRR greater than 5%.
D) There is not enough information to answer this question.

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 = 6.32%. Thus, Washington will reject the project as its IRR is less than its hurdle rate.