Question

Grace corporation whose required rate of return is 10%, is considering the purchase of a new piece of equipment. the internal rate of return of the project, which has a life of 8 years, is 12%. the project would have:

a. an accounting rate of return greater than 10%.
b. a payback period more than 8 years.
c. a net present value of zero.
d. a net present value greater than zero.

Answer 1

Grace Corporation's new equipment project with an IRR of 12% and a lifespan of 8 years would result in a net present value greater than zero since the IRR is higher than the required rate of return of 10%.

Step-by-step explanation:

The Grace Corporation is considering purchasing new equipment and is evaluating the investment using its internal rate of return (IRR) and the required rate of return. Given that the project has an internal rate of return of 12%, which is higher than the company's required rate of return of 10%, and the project's life span is 8 years, the correct answer to what the project would have is: d. a net present value greater than zero.

When the IRR exceeds the required rate of return, it indicates that the project is expected to generate returns higher than the opportunity cost of the company's capital, resulting in a positive net present value (NPV). It is incorrect to assert that the project would have an accounting rate of return greater than 10% without additional information, a payback period of more than 8 years (as the payback period could be less and is not related to IRR), or a net present value of zero, as the IRR above the required rate supports a positive NPV.