Question

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

Answer 1

If cost of capital is 15%

PROJECT X

Year Cashflow DF@15% PV

0 (80,000) 1 (80,000)

1-5 25,000 3.3522 83,805

NPV 3,805

PROJECT Z

Year Cashflow DF@15% PV

0 (120,000) 1 (120,000)

1-4 40,000 2.8550 114,200

NPV (5,800)

Accept project X if the cost of capital is at most 15%

The correct answer is C

Step-by-step explanation:

In this case, the net present value of each project will be computed at 15% cost of capital and the project with positive net present value will be accepted.