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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Gupta Plastics Ltd is considering a project with an initial outlay of Rs 3,00,000 and a single cash inflow of Rs 3,63,000 at the end of year 2. What is the IRR of the project?

The IRR is 10%. The rate that equates the present value of Rs 3,63,000 received after two years to the Rs 3,00,000 outlay satisfies (1+r)^2 = 1.21, so r is 10%. The 21% figure is the cumulative return, not the annual rate.

  1. A10%Correct
  2. B12%
  3. C8%
  4. D21%

Explanation

IRR solves 3,00,000 = 3,63,000/(1+r)^2, so (1+r)^2 = 1.21 and 1+r = 1.10, giving r = 10%. Check: 3,00,000 x 1.21 = 3,63,000. The 21% option wrongly treats total two-year return as an annual rate.

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