Marielle Machinery Works is considering a project which has an initial investment of £10,155 and has expected cash flows of £7,050 in year 1, £12,600 in year 2, and £18,150 in year 3. The company uses the IRR rule to accept or reject projects and has asked for your assessment on what to do if the required rate of return is 20%. Find IRR and make your decision to accept or reject the project. 19% and reject 22% and reject 19% and accept 50.81% and accept

IRR (Internal Rate of Return) is that rate of return at which when the cash flows are discounted the resultant NPV is 0 i.e. NiL
In order to answer the question, we make the NPV table to identify the range in which the IRR might lie and then we make use of interpolation to determine the exact IRR value.

In order to make this table we first list down the given cash flows corresponding to their respective year.

Then we calculate the present values using the discount rate(s)*.

* Discount rate is ascertained using the hit-and-trial method to determine a broader range of values. Using that, we determine 86% and 87% as discount rates. At 86%, the NPV is the cash flows is 97.93 Pound while at 87% the NPV is -6.18 pounds. This means that the IRR must lie between these 2 rates:

using interpolation, the required IRR (the rate at which NPV=0) is:
= rate with positive NPV + [(positive NPV - 0) / (positive NPV - negative NPV)]
= 86% + [(97.93-0) / (97.93 - (- 6.18))]
= 86% + 97.93 / (97.93 + 6.18)
= 86% + 97.93 / 99.18
= 86% + 0.9873%
= 86.9873%

Thus, the IRR of the given series of cash flows is 86.9873% which is much higher than 20%.
Therefore, the project must be accepted.