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

question 32

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 10 percent, and that the maximum allowable payback and discounted payback statistics for the project are three and a half and four and a half years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected? $$\begin{array} { | l | l | l | l | l | l | l | l | } \hline \text { Time } & 0 & 1 & 2 & 3 & 4 & 5 & 6 \\\hline \text { Cash } & - 85,000 & \$ 12,000 & \$ 11,000 & \$ 13,000 & \$ 21,000 & \$ 31,000 & \$ 32,000 \\\text { Flow } & & & & & & & \\\hline\end{array}$$

• A)MIRR = 11.59 percent; accept the project
• B)MIRR = 9.21 percent; reject the project
• C)MIRR = 7.19 percent; reject the project
• D)MIRR = 10.58 percent; accept the project

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Definitions:

Inflations

A widespread rise in prices accompanied by a decrease in money's buying power.

Deficits

The amount by which a government, company, or individual's spending exceeds its income over a particular period of time.

Surpluses

Occurs when the quantity of a good produced exceeds the quantity demanded, often leading to price reductions.

Inflationary Gap

A situation where the demand for goods exceeds supply at the current price levels, leading to an increase in prices and inflation.