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A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $210,000. The present value of the future cash flows is $225,000. The company’s desired rate of return used in the present value calculations was 12%. Which of the following statements is true?

(A) The project should not be accepted because the net present value is negative.
(B) The internal rate of return on the project is less than 12%.
(C) The internal rate of return on the project is more than 12%.
(D) The internal rate of return on the project is equal to 12%.

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Answer:

(C) The internal rate of return on the project is more than 12%.

Explanation:

First, find the NPV (Net Present Value);

Net Present Value of a project =  -Initial investment +  Present value of the project's future cashflows;

NPV = -210,000 + 225,000

NPV = 15,000

Since, the NPV is positive, the company will accept this project . IRR rule always agree on the decision to accept or reject a project so long as the pattern of cashflows is the same. Therefore, the internal rate of return on the project is more than the required rate of 12% which is also the discount rate used to calculate the present value of future cashflows,

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