Equivalent Annual Cost: Your Firm Is Considering an Investment That

question 46

Multiple Choice

Equivalent Annual Cost: Your firm is considering an investment that will cost $750,000 today. The investment will produce cash flows of $250,000 in year 1, $400,000 in year 2, and $600,000 in year 3. The discount rate that your firm uses for projects of this type is 11.75%. What is the investment's equivalent annual cost? (Round off to the nearest whole dollar)

• A) $163,613
• B) $225,008
• C) $68,888
• D) $92,845

---

Definitions:

Required Return

The minimum expected return an investor demands for holding a particularly risky investment.

Market Capitalization Rate

An alternative term often used to refer to the cost of equity or the expected return of a market portfolio.

Plowback Ratio

A metric indicating the percentage of earnings retained by a company after dividends have been paid out to shareholders.

P/E Ratio

A valuation metric that compares the current share price of a company to its per-share earnings.