1. Which of the following is the decision criteria that firms use when analyzing the internal...

1. Which of the following is the decision criteria that firms use when analyzing the internal rate of return of a particular capital budgeting project?

A. If the IRR is greater than zero, then the firm should accept.

B. If the IRR is greater than inflation, then the firm should accept.

C. If the IRR is greater than the firm’s cost of capital, then the firm should accept.

D. If the IRR is greater than the firm’s cost of capital, then the firm should reject.

E. If the IRR is greater than inflation, then the firm should reject.

2. Corporation is undertaking a ten-year project and it is projected to pay back within only one year—or in other words, the payback period is less than one year. Should Corporation accept this project?

A. Yes, the ten-year project pays back within only one year.

B. No, the ten-year project is too long and therefore too risky.

C. You cannot make this determination because you do not know what is acceptable to management.

Solutions

Expert Solution

Answer 1. The Correct Answer is C. If the IRR is greater than the firm’s cost of capital, then the firm should accept.

Because the Cost of Capital is the minimum rate of return that is required by the stakeholders from the Project. And if the Project has Return IRR Higher than Minimum Required return hence such Project should be accepted.

If the IRR of a project is greater than or equal to the project's cost of capital, accept the project. However, if the IRR is less than the project's cost of capital, reject the project. The rationale is that you never want to take on a project for your company that returns less money than you can pay to borrow money, that is, the company's cost of capital.

Answer 2. The Correct Answer is A. Yes, the ten-year project pays back within only one year.

As the Payback period is Less than 1 year it indicates a Profitable Investment. Hence Accept the Decision.

jeff jeffy answered 1 year ago

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