Union Atlantic Corporation, which has a required rate of return equal to 14 percent, is evaluating a capital budgeting project. The initial cash outflow is $170,000 and cash inflow at the year-end of each of the following four years is $60,750. According to this information, which of the following statements is correct?

Question

Quizplus · Accepted Answer

The project's net present value (NPV) should be calculated to determine its acceptance. Since the project has positive cash flows and 14% required rate of return, the project's NPV will be positive, indicating that the project is acceptable. Option A is incorrect because the IRR could be greater than, equal to, or less than the required rate of return. Option B is incorrect because it assumes that the project has a limited economic life, which is not mentioned in the problem. Option D is incorrect because discounted payback period already takes into account the time value of money, and comparing it with traditional payback period is not necessary. Option E is incorrect because the positive NPV implies that the project generates value for the company, meaning that the inflows would be greater than the outflows.

Union Atlantic Corporation, Which Has a Required Rate of Return