A firm is evaluating two independent projects utilizing the internal rate of return technique. Project X has an initial investment of $80,000 and cash inflows at the end of each of the next five years of $25,000. Project Z has a initial investment of $120,000 and cash inflows at the end of each of the next four years of $40,000. The firm should
A) accept both if the cost of capital is at most 15 percent.
B) accept only Z if the cost of capital is at most 15 percent.
C) accept only X if the cost of capital is at most 15 percent.
D) none of the above

Question

Quizplus · Accepted Answer

To determine the best choice, we need to calculate the internal rate of return (IRR) for each project and compare it with the cost of capital.

For Project X: 
Initial investment = -$80,000 
Cash inflows = $25,000 per year for 5 years

Using a financial calculator or spreadsheet, we find that the IRR for Project X is 17.8%

For Project Z: 
Initial investment = -$120,000 
Cash inflows = $40,000 per year for 4 years

Using a financial calculator or spreadsheet, we find that the IRR for Project Z is 15.7%

Since the cost of capital is at most 15%, we should only accept the project with the highest IRR - Project X. Therefore, the best choice is to accept only X if the cost of capital is at most 15 percent.

A Firm Is Evaluating Two Independent Projects Utilizing the Internal