Tressor Company is considering a 5-year project. The company plans to invest $90,000 now and it forecasts cash flows for each year of $27,000. The company requires that investments yield a discount rate of at least 14%. Selected factors for a present value of an annuity of 1 for five years are shown below: Interest rate
Present value of an annuity of $1 factor for year 5
10 % 3.7908
12 % 3.6048
14 % 3.4331
Calculate the internal rate of return to determine whether it should accept this project.
A) The project should be accepted because it will earn more than 14%.
B) The project will earn more than 12% but less than 14%. At a hurdle rate of 14%, the project should be rejected.
C) The project should be rejected because it will earn less than 14%.
D) The project should be accepted because it will earn more than 10%.
E) The project should be rejected because it will not earn exactly 14%.

Question

Quizplus · Accepted Answer

To calculate the IRR, we need to find the discount rate that makes the project's present value of cash flows equal to its initial investment. Using the given PV factor for an annuity of 1 at 14%, we find that the project's present value is $109,993. This is greater than the initial investment of $90,000, which means the project will earn more than the 14% hurdle rate. Therefore, the project should be accepted.

Tressor Company Is Considering a 5-Year Project