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

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

Quizplus · Accepted Answer

To choose the best project, we need to compare the internal rates of return (IRRs) with the cost of capital (13%). A project is acceptable if its IRR is greater than the cost of capital.

Project 1: IRR = 10% < 13% (rejected)
Project 2: IRR = 14% > 13% (accepted)
Project 3: IRR = 12% < 13% (rejected)

Therefore, we should accept Projects 2 and 3 and reject Project 1. However, the statement that says "accept Projects 2 and 3" is incorrect, as Project 3 should be rejected. Only Project 2 should be accepted. Therefore, the correct answer is B.

A Firm with a Cost of Capital of 13 Percent