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CS Professional · Strategic Management and Corporate Finance · Project Evaluation

Sundaram Foods Ltd is assessing a project costing Rs 1,00,000 giving a single inflow of Rs 1,21,000 at the end of Year 2, with no other cash flows. The company's cost of capital is 12%. Which statement is correct?

The IRR is 10% because 1,21,000 divided by 1,00,000 equals 1.21, which is 1.10 squared. As 10% is lower than the 12% cost of capital, the project earns less than required and should be rejected.

  1. AIRR is 10%, so the project should be accepted
  2. BIRR is 10%, so the project should be rejectedCorrect
  3. CIRR is 21%, so the project should be accepted
  4. DIRR is 11%, so the project should be rejected

Explanation

IRR solves 1,00,000 = 1,21,000/(1+r)^2, so (1+r)^2 = 1.21 and r = 10%. Since 10% is below the 12% cost of capital, the project is rejected. Taking 21% as IRR ignores compounding over two years.

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