An Investment That Costs $82,000 Is Expected to Reduce Cash

question 46

Multiple Choice

An investment that costs $82,000 is expected to reduce cash operating costs by $27,000 per year for 4 years.Based on the internal rate of return of the investment, should the investment be undertaken if the required rate of return is 9 percent?

• A)No, the actual return of 3.04% is less than the required rate of return
• B)Yes, because the return of 12% is more than the hurdle rate
• C)Yes, because the IRR is more than 30%
• D)Yes, because the NPV exceeds the cost by $26,000

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Definitions:

Marginal Cost

The financial outlay required to produce an additional unit of a product or service.

Average Total Cost

The total cost of production (fixed and variable costs combined) divided by the quantity of output produced, reflecting the cost per unit of output.

Time

A continuous measurement that exists uniformly and independently from everything else, used to sequence events and compare the durations of events and the intervals between them.

Marginal Output

The additional output that is produced by using one more unit of a particular input.