Question

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $210,000. The present value of the future cash flows is $225,000. The company's desired rate of return used in the present value calculations was 12%. Which of the following statements is true Select one: a. The project should not be accepted because the net present value is negative. b. The internal rate of return on the project is less than 12%. c. The internal rate of return on the project is more than 12%. d. The internal rate of return on the project is equal to 12%.

Answer 1

Answer:

b. The internal rate of return on the project is less than 12%

Explanation:

Net present value = present value - amount invested

$225,000 - $210,000 = $15,000

The IRR is the discount rate that equates the after tax cash flows from an investment to the amount invested .

$225,000 / (1 + IRR) = $210,000

IRR = 7.14%

The IRR is less than the desired rate of return.

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