The problem describes a firm with a cost of capital of 13.5% evaluating three capital projects with different internal rates of return (IRR). The firm should accept projects where the IRR exceeds the cost of capital and reject projects where the IRR is less than the cost of capital. The IRR for Project 1 is 12%, for Project 2 is 15%, and for Project 3 is 13%. We need to determine which projects the firm should accept or reject.
Applied MathematicsFinancial MathematicsInvestment AppraisalInternal Rate of Return (IRR)Cost of CapitalDecision Making
2025/7/8
1. Problem Description
The problem describes a firm with a cost of capital of 13.5% evaluating three capital projects with different internal rates of return (IRR). The firm should accept projects where the IRR exceeds the cost of capital and reject projects where the IRR is less than the cost of capital. The IRR for Project 1 is 12%, for Project 2 is 15%, and for Project 3 is 13%. We need to determine which projects the firm should accept or reject.
2. Solution Steps
The firm should accept projects where the Internal Rate of Return (IRR) is greater than the cost of capital. The cost of capital is 13.5%.
* Project 1: IRR = 12%. Since 12% < 13.5%, the firm should reject Project
1. * Project 2: IRR = 15%. Since 15% > 13.5%, the firm should accept Project
2. * Project 3: IRR = 13%. Since 13% < 13.5%, the firm should reject Project
3.
Therefore, the firm should accept Project 2 and reject Projects 1 and
3.
3. Final Answer
c. Accept Project 2, and reject Projects 1 and 3