Consider the following investment/dividend opportunities facing a company:
Assume that the interest rate in the capital market is 12 per cent per period.Calculate the rate of return on Project Normal.

Question

Consider the following investment/dividend opportunities facing a company: 
Assume that the interest rate in the capital market is 12 per cent per period.Calculate the rate of return on Project Normal.

Quizplus · Accepted Answer

To calculate the rate of return on Project Normal, we need to use the formula:
Rate of Return = (Total Cash Inflows / Initial Investment)^(1/Number of Periods) - 1

For Project Normal, the total cash inflows are $10,000 per period for 3 periods, plus a terminal cash inflow of $15,000. So the total cash inflows are:

$10,000 + $10,000 + $10,000 + $15,000 = $45,000

The initial investment is $35,000, so we can calculate the rate of return as follows:

Rate of Return = ($45,000 / $35,000)^(1/3) - 1
Rate of Return = 0.136, or 13.6%

Therefore, the best choice is C, as it has the highest rate of return among the given options.

Consider the Following Investment/dividend Opportunities Facing a Company