A Project Has Been Assigned a Required Annual Accounting Return

question 121

Multiple Choice

A project has been assigned a required annual accounting return of 14% and a required discount rate of 9%. The initial cost of the project is $25,000. The project produces annual cash flows of
$9,876 a year for three years. What is the profitability index of this project?

• A) .92
• B) 1.00
• C) 1.03
• D) 1.09
• E) 1.19

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Definitions:

Short-term Capital Gain

A profit from the sale of an asset held for one year or less, taxed as ordinary income.

Long-term Capital Loss

A loss realized from the sale of a capital asset held for more than one year, which can offset capital gains and reduce taxable income.

Recognized Gains

Profits from the sale of an asset that are realized and subject to capital gains tax.

Tax Bracket

A range of income subject to a particular income tax rate. Tax systems often have several brackets, with individuals paying a higher rate as their income increases.