A Firm Is Evaluating Two Independent Projects Utilizing the Internal

question 47

Multiple Choice

A firm is evaluating two independent projects utilizing the internal rate of return technique. ProjectX has an initial investment of $80,000 and cash inflows at the end of each of the next five years of$25,000. Project Z has an initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm should

• A) accept both if their cost of capital is 15% at the maximum.
• B) reject both if their cost of capital is 12% at the maximum.
• C) accept only Z if their cost of capital is 15% at the maximum.
• D) accept only X if their cost of capital is 15% at the maximum.

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Definitions:

Interest on Interest

Earnings from reinvesting the interest received from an investment, leading to exponential growth over time.

Annually

Concerning an event that takes place annually.

Simple Interest

Interest calculated only on the principal amount, or on that portion of the principal amount that remains unpaid, not including interest on interest.

Rate of Interest

The percentage of principal charged by the lender for the use of its money.