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

question 35

Multiple Choice

Suppose your firm is considering investing in a project with the cash flows shown as follows, 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? $$\begin{array} { | l | l | l | l | l | l | l | l | } \hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \text { Cash } & - \$ 5,000 & \$ 1,200 & \$ 1,400 & \$ 1,600 & \$ 1,600 & \$ 1,100 & \$ 2,000 \\ \text { Flow } & & & & & & & \\\hline\end{array}$$

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

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Definitions:

Reddened Area

A patch of skin that appears red due to inflammation, irritation, or the presence of an underlying condition.

Inconclusive

Not leading to a firm conclusion or definitive result; leaving questions unanswered.

Pursed-Lip Breathing

A breathing technique that involves breathing in through the nose and out through tightly pressed (pursed) lips to improve breath control.

Emphysema

A long-term, progressive disease of the lungs that primarily causes shortness of breath due to over-inflation of the air sacs (alveoli).