Spence Company Is Considering a Project That Has the Following $\begin{array} { l c c c c c } \text { Year } & 0 & 1 & 2 & 3 & 4 \\ \text { Cash flows } & - \$ 1,050 & 400 & 400 & \$ 400 & 400\end{array}$

question 39

Multiple Choice

Spence Company is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's IRR can be less than the cost of capital or negative, in both cases it will be rejected.
$\begin{array} { l c c c c c } \text { Year } & 0 & 1 & 2 & 3 & 4 \\ \text { Cash flows } & - \$ 1,050 & 400 & 400 & \$ 400 & 400\end{array}$

• A) 14.05%
• B) 15.61%
• C) 17.34%
• D) 19.27%
• E) 21.20%

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Definitions:

Liquidity Premium

Additional yield that investors demand for holding a security that is not easily traded or sold without a significant price reduction.

Maturity Risk Premium

The extra yield that investors demand to compensate for the risk of holding a bond until its maturity date.

T-bonds

Treasury bonds, long-term government debt securities with maturity periods typically over 20 years, offering interest payments semiannually.

Corporate Bonds

Debt securities issued by corporations to finance their operations, expansions, or projects, which pay fixed or variable interest rates to investors.