Benson Corporation is considering an investment in equipment that would cost $50

Question

Benson Corporation is considering an investment in equipment that would cost $50,000 and provide annual cash inflows of $14,000. The company's required rate of return is 12%; the internal rate of return for the investment is 10.5%. Should the company make this investment?

A.           No, since the internal rate of return is more than the company's required rate of return.

               B.           Yes, since the internal rate of return is less than the company's required rate of return.

               C.           No, since the internal rate of return is less than the company's required rate of return.

               D.           The answer cannot be determined.

Explanation / Answer

Ans) (c)

Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.

The required rate of return is the minimum return an investor should accept, given all other options available and the capital structure of the firm.
No, the company should not make this investment because IRR< Required rate of return.

As per the IRR rule of investment in a new project/investment, if IRR> required rate of return, then the decision would generally be accepted

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