A company is considering a 5-year project. It plans to invest $62,000 now and it forecasts cash flows for each year of $16,200. The company requires a hurdle rate of 12%. Calculate the internal rate of return to determine whether it should accept this project. Selected factors for a present value of an annuity of 1 for five years are shown below: Interest rate Present value of an annuity of 1 factor10% 3.790812%3.604814%3.4331
What will be an ideal response?
Investment/Annual net cash flows = $62,000/$16,200 = 3.827.
The present value factor of 3.827 falls below 10%. This project earns less than 10%. If the hurdle rate is 12%, this project should be rejected.
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