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Homework answers / question archive / A project with a 3-year life has a payback period of 2

A project with a 3-year life has a payback period of 2

Finance

A project with a 3-year life has a payback period of 2.56 years and an NPV of -$218 using a discount rate of 13.50%. Assume that the initial cash flow is negative and all future cash flows are positive. Without any additional calculations, what is the UPPER bound on the project's IRR? That is, given this project's cash flow metrics, what can the IRR be at a maximum? Remember to choose the best answer without doing any calculations.

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From the details given in the question I have observed the following facts

  1. The project has payback period of 2.56 yrs which is slightly closer to life of the project.
  2. Negative Net present value of 218 dollars for the project

After observing the above this project is not viable to take up

When comes to IRR,it is the rate at which present value of cash outflows equals present value of cash inflows i;e in simple words NPV should be equal to zero

In this case NPV is in negative value when discount rate is 13.5%.So to bring the NPV to zero IRR rate shound be greater than discounting rate of 13.5%

Conclusion:IRR should be greater than 13.5%

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