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:

Perfectly Inelastic

A situation in demand where the quantity demanded does not change regardless of changes in price.

Short Run

A period of time during which at least one of a firm's inputs is fixed, limiting its capacity to adjust to changes in demand.

Rent

A periodic payment made by tenants to landlords for the use of land, a building, or other property.

Supply Curve

A curve that illustrates the supply for a product by showing how each possible price (on the vertical axis) is associated with a specific quantity supplied (on the horizontal axis).