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 less than 10%.
C)The project earns more than 10% but less than 12%.At a hurdle rate of 12%,the project should be rejected.
D)Only 9% is acceptable.
E)Only 10% is acceptablE.Investment/Annual net cash flows = $60,000/$16,200 = 3.704

Question

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 less than 10%. 
C)The project earns more than 10% but less than 12%.At a hurdle rate of 12%,the project should be rejected. 
D)Only 9% is acceptable. 
E)Only 10% is acceptablE.Investment/Annual net cash flows = $60,000/$16,200 = 3.704

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR), we need to find the discount rate that makes the present value of the cash inflows equal to the initial investment. Using the given factors for the present value of an annuity of 1 for five years, we can find the present value of the cash inflows as follows:

PV of cash inflows = $16,200 x annuity factor for 5 years at 12% = $16,200 x 3.605 = $58,341.90

To find the IRR, we need to solve for the discount rate that makes the PV of the cash inflows equal to the initial investment of $60,000. Using trial and error or a financial calculator, we find that the IRR is approximately 11.17%.

Since the IRR (11.17%) is less than the hurdle rate of 12%, the project should be rejected. Therefore, the best choice is C.

A Company Is Considering a 5-Year Project