You are considering an investment in a clothes distributer. The company needs $ 102 comma 000 today and expects to repay you $ 125 comma 000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 10 %. What does the IRR rule say about whether you should invest?

Question

Business

Jenny Donaldson

2 December, 19:36

You are considering an investment in a clothes distributer. The company needs $ 102 comma 000 today and expects to repay you $ 125 comma 000 in a year from now. What is the IRR of this investment opportunity? Given the riskiness of the investment opportunity, your cost of capital is 10 %. What does the IRR rule say about whether you should invest?

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Answers (1)

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Regina Murphy · Answer 1

You Should invest

Explanation:

Let the IRR be x.

Now, Present Value of Cash Outflows=Present Value of Cash Inflows

103,000 = 130,000 / (1.0x)

Or x = 26.214%

Hence the IRR of this investment opportunity is 26.2% (approx)

Cost of Capital = 12%

The IRR rule says that one must accept. This is because the IRR is greater than the cost of capital.

Hence the correct answer is : should invest