The director of capital budgeting of South Park Development Corporation is evaluating a project that will cost $200,000;it is expected to last for 10 years and produce after-tax cash flows,including depreciation,of $44,503 per year.If the firm's cost of capital is 14% and its tax rate is 40%,what is the project's IRR?
A)8%
B)14%
C)18%
D)-5%

Question

Quizplus · Accepted Answer

To calculate the Internal Rate of Return (IRR) of the project, we need to find the discount rate that makes the present value of the cash inflows equal to the initial investment of $200,000.

Using a financial calculator or Excel, we find that the IRR of the project is 18.16%. Since this is higher than the cost of capital of 14%, the project is acceptable and will add value to the firm.

Therefore, the best choice is C) 18%.

The Director of Capital Budgeting of South Park Development Corporation