ABC Corp. is considering an investment project that costs $500 today. It expects the project will yield income of $200 at the end of years 1, 2, and 3. The interest rate must be ________ for the firm to undertake the project.

Question

Quizplus · Accepted Answer

The firm will undertake the project if the present value of future cash flows is greater than or equal to the investment cost. If the interest rate is no more than 9%, the present value of the $200 annual income for 3 years will be enough to cover or exceed the initial $500 investment, making the project viable. Higher interest rates would decrease the present value of future cash flows, making the project less attractive.

ABC Corp Is Considering an Investment Project That Costs $500 Today