A firm has the opportunity to invest in a project having an initial outlay of $20,000. Net cash inflows (before depreciation and taxes) are expected to be $5,000 per year for five years. The firm uses the straight-line depreciation method with a zero salvage value and has a (marginal) income tax rate of 40 percent. The firm’s cost of capital is 12 percent.
What is the internal rate of return (IRR) for the project? 4.6% (Hint: Present value of an ordinary annuity of $1 for 5 years is $4.3295 at the discount rate of 5% and $4.4518 at the discount rate of 4%.)
What is the net present value (NPV) of cash flows from the project? -$3,759.83
Should the firm accept the project?
Yes
No