Question

A company is considering a project that will cost $100,000. To determine market potential, the company paid $5000 to a firm to perform market research. The firm estimates that the project will produce $15,000 in the first 2 years and $25,000 in the remaining 3 years. At the end of the project the company can sell the assets for $20,000. The hurdle rate is 6.5%. Given the IRR that you calculated in the previous problem, which of the following is true? The IRR is greater than the hurdle rate, so A the project should be accepted. The IRR Is greater than the hurdle rate, so В the project should be rejected. The IRR Is less than the hurdle rate, so the C project should be rejected. The IRR Is less than the hurdle rate, so the D project should be accepted. 2 attempts left. Submit

Answer 1

Calculating IRR,

105,000 = 15,000/(1+IRR)* + 25,000/(1+I RR)* +20,000/(1+ IRR)5

IRR = 5.09%

The IRR is less than hurdle rate, so the project should be rejected.