A Company Is Considering a 5-Year Project

question 152

Multiple Choice

A company is considering a 5-year project. The company plans to invest $60,000 now and it forecasts cash flows for each year of $16,200. The company requires a hurdle rate of 12%. Calculate the internal rate of return to determine whether it should accept this project. Selected factors for a present value of an annuity of 1 for five years are shown below: Interest rate
Present value of an annuity of $1 factor for year 5
10 % 3.7908
12 % 3.6048
14 % 3.4331

• A) The project earns more than 10% but less than 12%. At a hurdle rate of 12%, the project should be rejected.
• B) The project should be accepted.
• C) The project should be rejected because it earns less than 10%.
• D) Only 9% is acceptable.
• E) Only 10% is acceptable.

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Definitions:

Fixed Costs

Costs that do not change with the level of output or sales, such as rent, salaries, and insurance premiums.

Fixed Costs

Financial obligations like rent, salaries, and insurance that do not vary with changes in production or sales figures.

Utilization Rate

Typically refers to the ratio of currently used resources to the total available resources, often used in the context of credit utilization or operational capacity.

Net Income

The total earnings or profit of a person or company after deducting all expenses and taxes.