A Company Is Considering a Five-Year Project

question 60

Essay

A company is considering a five-year project.It plans to invest $80,000 now and it forecasts cash inflows for each year of $22,857.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:
$$\begin{array}{cc}\underline{\text{Interest}}&&\underline{\text{Present Value of an Annuity of 1}}\\\underline{\text{ Rate}}&&\underline{\text{ factor}}\\10 \%&&3.7908 \\12 \%&&3.6048 \\14 \%&&3.4331\end{array}$$

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Definitions:

Activity-Based Costing

An approach to costing that recognizes organizational activities and distributes each activity's costs to every product and service, reflecting their real consumption.

High-Low Method

A technique used in cost accounting to estimate fixed and variable costs based on the highest and lowest levels of activity.

Variable Cost

A cost that varies directly with the level of production or sales volume, such as materials and labor costs.

Regression Study

An analysis technique used to determine the relationship between dependent and independent variables, often used for prediction and forecasting.