The Acorn Project Will Require an Initial Cash Outflow of $25,000

question 18

Essay

The Acorn Project will require an initial cash outflow of $25,000. The project is
expected to return $8,000, $10,000, and $14,000 in years one, two, and three,
respectively. The project has a required rate of return of 15%. Use the internal rate of
return evaluation technique to determine whether or not this project should be
accepted. Explain your answer.

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Definitions:

Option Contracts

Financial derivatives that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a certain date.

Swap Contracts

Financial agreements between two parties to exchange cash flows or other financial instruments for a specified period of time.

Put Option

A contract in finance that provides the bearer the privilege, but avoids the necessity, to dispense a specific measure of an underlying asset at a particular price during an outlined period.

Options Contract

A contract giving the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specified price on or before a certain date.