In a situation such as Acron’s, where a one-time cost is followed by a sequence of cash flows, the internal rate of return(IRR) is the that makes the NPV equal to 0. The idea is that if the is greater than the IRR, the company will not pursue the project, but if the is less than the IRR, the project is financially attractive.
a. Use Excel’s Goal Seek tool to find the IRR for the Acron model.
b. Excel also has an IRR function. Look it up in online help to see how it works, and then use it on Acron’s model. Of course, you should get the same IRR as in part a.
c. Verify that the NPV is negative when the is slightly greater than the IRR, and that it is positive when the is slightly less than the IRR.
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