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

question 53

Multiple Choice

Suppose your firm is considering investing in a project with the cash flows shown below, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback and discounted payback statistics for the project are 3.5 and 4.5 years, respectively. Use the IRR decision to evaluate this project; should it be accepted or rejected?

• A) IRR = 16.92%; accept the project
• B) IRR = 7.123%; reject the project
• C) IRR = 18.32%; accept the project
• D) IRR = 7.59%; reject the project

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Definitions:

Fair Value

The estimated market value of an asset or liability in an arm's length transaction between informed and willing parties.

Investment Income

Income received from the assets invested in, such as dividends, interest, or rental income.

Common Stock

Shares of ownership in a corporation that grant holders voting rights and a share of the company’s profits through dividends.

Long-Term Investment

Investments a company intends to hold for more than one year, typically including stocks, bonds, or real estate.