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:

Question

Quizplus · Accepted Answer

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 = $59,205

Therefore, 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)/IRR
IRR = 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.

A Company Is Considering a 5-Year Project