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A company is contemplating investing in a new piece of manufacturing machinery. The amount to be invested is $100,000. The present value of the future cash flows at the company's desired rate of return is $100,000. The IRR on the project is 12%. Which of the following statements is true?

a.The desired rate of return used to calculate the present value of the future cash flows is less than 12%.
b.The desired rate of return used to calculate the present value of the future cash flows is equal to 12%.
c.The desired rate of return used to calculate the present value of the future cash flows is more than 12%.
d.The project should not be accepted because the net present value is negative.

Respuesta :

Answer:

b.The desired rate of return used to calculate the present value of the future cash flows is equal to 12%.

Explanation:

Net present value method: In this method, the initial investment is subtracted from the discounted present value cash inflows. If the amount comes in positive than the project is beneficial for the company otherwise not.

Internal rate of return: It is that rate at which the net present value is equal to zero that means the initial investment and the present value of the future cash flows are equal

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