Question

ABC Corp. is considering an investment project that costs $500 today. It expects the project will yield income of $200 at the end of years 1, 2, and 3. The interest rate must be ________ for the firm to undertake the project.

Answer 1

B) no more than 9%

Step-by-step explanation:

The computation of the rate of interest is given below:

Given that

Initial Cost = $500

Yearly Yield = $200

Based on the above information

Let us assume the rate of interest be 10%

So,

PV at 10% is

= - $500 + $200 ( P/A , 10% , 3 )

= -$500 + $200 ( 2.487 )

= - 500 + 497.4

= -2.6

As we can see that the at 10% there is a negative value and if we take more than 10% so again it would be the negative value

Now

Let us assume the rate of interest be 10%

So,

PV at 8% is

= - $500 + $200 ( P/A , 8% , 3 )

= -$500 + $200 ( 2.577 )

= -$500 + $515.4

= $15.4

So the rate of interest would not be more than 9%