Asked by Clayton Carter on Jul 19, 2024
Verified
ABC Corp. is considering an investment project that costs $500 today. It expects the project will yield income of $200 at the end of years 1, 2, and 3. The interest rate must be ________ for the firm to undertake the project.
A) at least 11%
B) no more than 9%
C) exactly equal to 10%
D) It is indeterminate from the given information.
Interest Rate
The cost of borrowing money or the return on investment, typically expressed as a percentage of the sum borrowed or invested per year.
Undertake Project
To begin or commit to a planned series of actions or tasks.
- Evaluate financial choices through computations of present value.
Verified Answer
AM
Alyssa MilesJul 25, 2024
Final Answer :
B
Explanation :
The firm will undertake the project if the present value of future cash flows is greater than or equal to the investment cost. If the interest rate is no more than 9%, the present value of the $200 annual income for 3 years will be enough to cover or exceed the initial $500 investment, making the project viable. Higher interest rates would decrease the present value of future cash flows, making the project less attractive.
Learning Objectives
- Evaluate financial choices through computations of present value.