Management has set standards for new projects that dictate the required rate of

Question

Management has set standards for new projects that dictate the required rate of return be 7% and the payback cutoff be 5 year Match each piece of data for a potential capital project with what the company should recommend based on that piece of data Answer options may be used more than once or not at all. Select your answers from the pull-down list. 49 Internal rate of return is 11% Accept the c Payback period is 7 29 years Reject the capital project Profitability index is 1.25 Accept the capital project Net present value is $42,000 Accept the capital project apital project NEXT BOOKMARK CLEAR

Explanation / Answer

1. Internal rate of return is 11% : Accept the capital project

Since, the internal rate of return is higher than the required rate of return, the project should be accepted. IRR is the rate at which the net present value of the project is zero. Any rate less than the IRR shall give positive net present value.

2.

Payback period is 7.29 years : Reject the capital project.

The cutoff payback period is fixed at 5 years. It means that any project having payback period more than 5 years shall not be accepted.

3.

Profitability index is 1.25 : Accept the capital project

Profitbaility index more than 1 is the indication of the profitabiity of the project. It indicates that the present value of all the cash inflows of the project will be sufficient to cover 1.25 times of the cost of the project.

4.

Net present value is $42,000: Accept the capital project.

Project with positive net present value shall always be accepted because it indicates the present value of cash inflows of the project exceeds the cost of the project.

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