Given the internal rate of return of Project X and Project Y are 7% and 9% respectively. With a firm’s cost of capital 10%, which of the project(s) can be accepted?Group of answer choicesAccept Project X onlyReject both projectsAccept Project Y onlyAccept both projects
Question
Given the internal rate of return of Project X and Project Y are 7% and 9% respectively. With a firm’s cost of capital 10%, which of the project(s) can be accepted?Group of answer choicesAccept Project X onlyReject both projectsAccept Project Y onlyAccept both projects
Solution
Reject both projects. The reason is that the internal rate of return for both projects is less than the firm's cost of capital. The internal rate of return is the discount rate that makes the net present value of all cash flows (both positive and negative) from a particular project equal to zero. If the internal rate of return of a project is less than the cost of capital, it means the project is not expected to generate a return greater than the cost of the funds used to finance the project. Therefore, neither Project X nor Project Y should be accepted.
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