Suppose Your Firm Is Considering Investing in a Project with the Cash

question 3

Multiple Choice

Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the IRR decision to evaluate this project; should it be accepted or rejected?
$$\begin{array} { l c c c c c c c c } \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\text { Cash Flow } & - \$ 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000\end{array}$$

• A) IRR = 16.92 percent, accept the project
• B) IRR = 7.123 percent, reject the project
• C) IRR = 8.81 percent, reject the project
• D) IRR = 10.59 percent, accept the project

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Definitions:

Product Life Cycle

The stages through which a product moves from its introduction into the market through its growth, maturity, and eventual decline.

Maturation

The process of growth and development, either in biological organisms or in organizations as they evolve and reach full potential.

Diffuse

To spread or scatter widely or thinly; often relating to the dissemination of ideas or technologies.

Try-demo Units

Sample products or systems that are offered for trial use to demonstrate their capabilities or features before a purchase decision is made.