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: Interest rate
Present value of an annuity of $1 factor for year 5
10 % 3.7908
12 % 3.6048
14 % 3.4331
A) The project earns more than 10% but less than 12%. At a hurdle rate of 12%, the project should be rejected.
B) The project should be accepted.
C) The project should be rejected because it earns less than 10%.
D) Only 9% is acceptable.
E) Only 10% is acceptable.

Question

Quizplus · Accepted Answer

The IRR is the rate that makes the NPV of cash flows equal to zero. Using the annuity factor, $16,200 * 3.6048 = $58,239.36, which is less than $60,000. Therefore, the IRR is between 10% and 12%, and the project should be rejected at a 12% hurdle rate.

A Company Is Considering a 5-Year Project