An INDEPENDENT project costs $75,000 and will return cash flows of $10,000 for 3
ID: 2787851 • Letter: A
Question
An INDEPENDENT project costs $75,000 and will return cash flows of $10,000 for 3 years and $400,000 in year 4. In the fifth year, you will need to remove the equipment at a net cost of $356,000 (<- negative cash flow in year 5)
If you knew the firm's cost of capital rate (discount rate), which of the following measures would you use to determine whether to clearly ACCEPT or REJECT the project?
A) NPV
B) IRR
C) PI
D) Payback period
E) All of the above
F) NPV and PI
G) NPVPI and IRR
H) None of the above
Explanation / Answer
Answer is G) NPVPI and IRR
If NPV is postive project is acceptable
if Pi is more than 1 project i acceptable
if IRR is greater than Cost of capital Project is Acceptable