If a project costs $800 today and pays a return of $864 next year, what is the highest interest rate at which the project should be undertaken?
A) 6.4 percent
B) 7 percent
C) 8 percent
D) 8.64 percent

Question

Quizplus · Accepted Answer

The highest interest rate at which the project should be undertaken is the rate that makes the present value of the return ($864) equal to the cost ($800). The formula for future value is FV = PV * (1 + r). Solving for r gives r = (FV/PV) - 1 = ($864/$800) - 1 = 0.08 or 8 percent.

If a Project Costs $800 Today and Pays a Return