A firm with a cost of capital of 13 percent is evaluating three capital projects. The internal rates of return are as follows: The firm should
A) accept Project 2 and reject Projects 1 and 3.
B) accept Projects 2 and 3 and reject Project 1.
C) accept Project 1 and reject Projects 2 and 3.
D) accept Project 3 and reject Projects 1 and 2.

Question

A firm with a cost of capital of 13 percent is evaluating three capital projects. The internal rates of return are as follows:  The firm should
A) accept Project 2 and reject Projects 1 and 3. 
B) accept Projects 2 and 3 and reject Project 1. 
C) accept Project 1 and reject Projects 2 and 3. 
D) accept Project 3 and reject Projects 1 and 2.

Quizplus · Accepted Answer

The firm should accept projects with an internal rate of return higher than its cost of capital and reject projects with an internal rate of return lower than its cost of capital. 
Project 1 has an internal rate of return of 10%, which is lower than the firm's cost of capital of 13%. Therefore, it should be rejected. 
Project 2 has an internal rate of return of 14%, which is higher than the firm's cost of capital of 13%. Therefore, it should be accepted. 
Project 3 has an internal rate of return of 12%, which is also higher than the firm's cost of capital of 13%. Therefore, it should be accepted as well. Hence, the best choice would be to accept Projects 2 and 3 and reject Project 1.

A Firm with a Cost of Capital of 13 Percent