PZX Corporation has the opportunity to undertake an investment project that will cost $10,000 today and yield the company $13,310 in 3 years. PZX will forgo the project if the interest rate is higher than 10 percent.

Question

Quizplus · Accepted Answer

Given the information, if the project yields $13,310 in 3 years from a $10,000 investment today, the implied annual return can be calculated using the formula for the future value of a single sum: $FV = PV(1 + r)^n$, where $FV$ is the future value ($13,310), $PV$ is the present value ($10,000), $r$ is the annual interest rate, and $n$ is the number of periods (3 years). Solving for $r$ gives an annual interest rate of approximately 10%. Therefore, if the market interest rate is higher than 10%, the return on the investment would be less attractive compared to the market rate, leading PZX Corporation to forgo the project.

PZX Corporation Has the Opportunity to Undertake an Investment Project