A company is contemplating investing in a new piece of manufacturing machinery.

Question

A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company's desired rate of return is $100,000. The IRR on the project is 12%. Which of the following statements is true?

a)The desired rate of return used to calculate the present value of the future cash flows is equal to 12%

b)The desired rate of return used to calculate the present value of the future cash flows is more than 12%

c)The desired rate of return used to calculate the present value of the future cash flows is less than 12%

d)The project should not be accepted because the net present value is zero

Explanation / Answer

a. The desired rate of return used to calculate the present value of the future cash flows is equal to 12%.

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