Project Thor requires an initial investment of $50,000 and is expected to offer cash flows of $20,000 a year for the following three years. This project will be profitable, so long as the
Discount rate is
A)less than the cost of capital.
B)greater than the risk-free rate.
C)less than 9.7%.
D)greater than 10%.

Question

Quizplus · Accepted Answer

To determine if Project Thor will be profitable, we need to calculate the Internal Rate of Return (IRR) and compare it to the discount rate. The IRR is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In this case, without calculating the exact IRR, we can infer that if the discount rate is less than 9.7%, the NPV of the project will be positive, making the project profitable. This is because a lower discount rate increases the present value of future cash flows, making it more likely for the project to cover its initial investment and generate profit.

Project Thor Requires an Initial Investment of $50,000 and Is