Project Jupiter requires an initial investment of $100,000 and is expected to produce cash flows of $15,582 a year for the following 10 years. The project's NPV at the estimated cost of capital
Of 7.5% is $6,956. How high can the project's hurdle rate be before this project would no longer
Be acceptable? Round your answer to the nearest tenth of a percent.
A)It can be no greater than 8.5%.
B)It can be no greater than 7.5%.
C)It can be no greater than 9.0%.
D)It can be no greater than 7.0%.

Question

Quizplus · Accepted Answer

The project's NPV is positive at a cost of capital of 7.5%, meaning the project is currently acceptable. If the cost of capital or hurdle rate were to increase beyond 9.0%, the NPV would become negative and the project would no longer be acceptable. Therefore, the highest acceptable hurdle rate would be 9.0%. If the hurdle rate is greater than 9.0%, the project's NPV will decrease and become negative, making the project unacceptable. At a hurdle rate of 7.5%, the NPV is positive, and the project is acceptable. Therefore, the highest acceptable hurdle rate is 9.0% since any rate above that would make the NPV negative.

Project Jupiter Requires an Initial Investment of $100,000 and Is