Tressor Company Is Considering a 5-Year Project

question 115

Multiple Choice

Tressor Company is considering a 5-year project. The company plans to invest $90,000 now and it forecasts cash flows for each year of $27,000. The company requires that investments yield a discount rate of at least 14%. Selected factors for a present value of an annuity of $1 for five years are shown below: Calculate the internal rate of return to determine whether it should accept this project.

• A) The project should be accepted because it will earn more than 14%.
• B) The project should be accepted because it will earn more than 10%.
• C) The project will earn more than 12% but less than 14%. At a hurdle rate of 14%, the project should be rejected.
• D) The project should be rejected because it will earn less than 14%.
• E) The project should be rejected because it will not earn exactly 14%.

Analyze the factors determining the minimum required rate of return in different contexts.

Calculate margin and turnover components of ROI.

Determine appropriate investment opportunities based on residual income calculations.

Understand transfer pricing mechanisms within a corporation.

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Definitions:

Confidence Interval

A breadth of values, resulting from sample statistics, presumed to harbor the value of an undetected population parameter.

Confidence Level

The probability, expressed as a percentage, that a statistical parameter (e.g., mean) for a population lies within a specified confidence interval.

Confidence Interval

An expanse of values, culled from sample statistics, believed to hold the value of a cryptic population parameter.

Population Parameter

A numerical value that summarizes a characteristic of an entire population, such as its mean or standard deviation.