A project involves an immediate expenditure of $2 000, and will require additional expenditures of $150 a year for the next ten years, starting one year from now. After ten years it yields an income of $8 000, but a year later a further expenditure of $1 000 will be required to close down the project. What is its rate of return?
A)9%
B)10%
C)11%
D)12%
E)13%

Question

Quizplus · Accepted Answer

The correct answer is A because the rate of return is 9%. The project involves an immediate expenditure of $2 000, and will require additional expenditures of $150 a year for the next ten years, starting one year from now. After ten years it yields an income of $8 000, but a year later a further expenditure of $1 000 will be required to close down the project. The net present value of the project is $2 000 + $150 * (1 - (1 + 0.09)^-10) / 0.09 + $8 000 * (1 + 0.09)^-10 - $1 000 * (1 + 0.09)^-11 = $0. Therefore, the rate of return is 9%.

A Project Involves an Immediate Expenditure of $2 000, and Will