Asked by Munei Tshidavhula on May 21, 2024
Verified
A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years. If the interest rate is 7%, should the firm undertake the project? Show evidence to support your answer.
Interest Rate
The interest rate is the cost of borrowing money or the return earned from lending money, typically expressed as a percentage of the principal amount per year.
Payoff
The return or reward received from a particular action or investment, often analyzed in decision-making processes.
- Assess investment initiatives by applying net present value (NPV) and internal rate of return (IRR) techniques.
- Evaluate and identify the profitability of investments with respect to different interest rates.
Verified Answer
SC
Shaniyah ChambersMay 21, 2024
Final Answer :
With a 7% interest rate, the present value of the $3 million payoff is $2,138,958.54. Because the present value of the payoff is higher than the initial investment, the firm should undertake the project.
Learning Objectives
- Assess investment initiatives by applying net present value (NPV) and internal rate of return (IRR) techniques.
- Evaluate and identify the profitability of investments with respect to different interest rates.