A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company's desired rate of return is $100,000. The IRR on the project is 12%. Which of the following statements is true?

Question

Quizplus · Accepted Answer

Since the present value of the future cash flows at the desired rate of return is equal to the amount to be invested, the net present value is zero. Therefore, the project's internal rate of return is equal to the desired rate of return used to calculate the present value of the future cash flows, which is 12%. A zero net present value and an internal rate of return equal to the desired rate of return means that the project is acceptable.

A Company Is Contemplating Investing in a New Piece of Manufacturing