Question

A project analysis using the net present value method indicates that the present value of cash inflows is $120,000, and the total amount of investment required at the start of the project is $100,000. Which of the following statements best describes the results of the project analysis?
a. The project should be rejected because the actual rate of return expected from the project is less than the minimum desired rate of return.
b. The project should be accepted because the actual rate of return expected from the project is more than the minimum desired rate of return.
c. The project should be rejected because the actual rate of return expected from the project is more than the minimum desired rate of return.
d. The project should be accepted because the actual rate of return expected from the project is less than the minimum desired rate of return.

Answer 1

Answer:

The answer is B.

Explanation:

Cost of investment was $100,000

Present value of all the cash inflows = $120,000

Profit = $20,000 ($120,000 - $100,000)

Since the present value of all the cash inflows is greater than the initial cost of investment, the capital project should be accepted because the firm will be better off and shareholders' wealth will be increased.

The expected rate of return for the project is $20,000/$100,000

0.2 or 20%