Gladeer Company Is Evaluating an Investment That Will Cost $520,000

question 117

Multiple Choice

Gladeer Company is evaluating an investment that will cost $520,000 and will yield cash flows of $300,000 in the first year, $200,000 in the second year, and $100,000 in the third and final year. Use the tables below and determine the internal rate of return. Present value of $1:
$$\begin{array} { | l | r | r | r | r | } \hline &{ 8 \% } & { 9 \% } & { 10 \% } & 11 \% \\\hline 1 & 0.926 & 0.917 & 0.909 & 0.901 \\\hline 2 & 0.857 & 0.842 & 0.826 & 0.812 \\\hline 3 & 0.794 & 0.772 & 0.751 & 0.731 \\\hline 4 & 0.735 & 0.708 & 0.683 & 0.659 \\\hline 5 & 0.681 & 0.65 & 0.621 & 0.593 \\\hline\end{array}$$ The IRR of the project will be:

• A) between 9% and 10%.
• B) less than 8%
• C) less than 9%, more than 8%
• D) more than 10%

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Definitions:

Net Present Value

A calculation used to determine the value of an investment by estimating future cash flows and discounting them to their present value.

Flotation Costs

Expenses incurred by a company when it issues new securities, including underwriting fees, legal fees, and registration fees.

Debt

Debt is an amount of money borrowed by one party from another, to be repaid usually with interest.