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:

A) The project should be accepted.
B) The project should be rejected because it earns less than 10%.
C) The project earns more than 10% but less than 12%.At a hurdle rate of 12%,the project should be rejected.
D) Only 9% is acceptable.
E) Only 10% is acceptable.

Question

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:

A) The project should be accepted.
B) The project should be rejected because it earns less than 10%.
C) The project earns more than 10% but less than 12%.At a hurdle rate of 12%,the project should be rejected.
D) Only 9% is acceptable.
E) Only 10% is acceptable.

Julia Estrada · Accepted Answer

Final Answer : C, Explanation :  To calculate the internal rate of return (IRR), we need to find the discount rate that makes the present value of the cash inflows equal to the initial investment. Using the present value factor for an annuity of $1 for five years at a discount rate of 12%, we can calculate the present value of the cash inflows:PV = $16,200 x (1 - 1/1.12^5)/0.12 = $59,205Therefore, the IRR of the project is the discount rate that makes the PV of cash inflows equal to the initial investment of $60,000:$59,205 = $16,200 x (1 - 1/IRR^5)/IRRIRR = 12.03%Since the IRR (12.03%) is greater than the hurdle rate of 12%, the project earns more than the required rate of return and should be accepted. Therefore, the correct answer is C.

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