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:
A) The project should be accepted.
B) The project should be rejected because it earns more than 10%.
C) The project earns more than 10% but less than 12%. If the hurdle rate is 12%, the project should be rejected.
D) Only 9% is acceptable.
E) Only 10% is acceptable.

Question

Quizplus · Accepted Answer

The internal rate of return (IRR) is the rate at which the net present value (NPV) of all the cash flows (both positive and negative) from a project or investment equals zero. Given the investment of $60,000 and annual cash flows of $16,200 for 5 years, the IRR can be found by solving the NPV equation for the discount rate. The provided information does not include the exact IRR calculation but indicates that the project earns more than 10% but less than 12%. Since the company's hurdle rate is 12%, any project earning less than this rate should be rejected, as it does not meet the minimum required return.

A Company Is Considering a 5-Year Project