[Anonymous]

Can someone explain how another way of looking at this problem? Having difficulty understanding how they cam up with the logic. How do you know that the actual rate of return is greater than 10 percent with the factor of 6.145?Thanks.

The Look Company is considering an investment that would require an initial investment of $120,000. The investment would provide cash inflows of $20,000 per year for 10 years, starting one year from today. Look is trying to compute the internal rate of return for this investment.

On the line for 10 periods on the present value of an annuity factor table, the factor is 6.145 for 10%. If the hurdle rate for acceptable projects is 10%, will the project be accepted?

A.

Yes

B.

No

Incorrect C.

The internal rate of return is equal to the hurdle rate.

D.

Cannot be determined from information given

answer:

As interest rates get higher, the factors for the same number of periods become smaller. This is because, as the interest rates become higher, the time value of the money becomes higher. This makes the present value of the money lower. In this case, the factor of internal rate of return is 6:

$120,000 ÷ $20,000 = 6

If the hurdle rate of return is 10%, with a factor of 6.145, then the actual rate of return will be greater than 10%, and the project will be accepted.