A firm is considering a one-year project that requires an initial investment of $50,000. The project is expected to yield a total payoff of $53,000 at the end of the year. The current annual market interest rate available for a similar-risk investment is 7%. Using the future value formulation for investment profitability, should the firm undertake this project, and why?
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A firm is considering a one-year project that requires an initial investment of $50,000. The project is expected to yield a total payoff of $53,000 at the end of the year. The current annual market interest rate available for a similar-risk investment is 7%. Using the future value formulation for investment profitability, should the firm undertake this project, and why?
Project Profitability Analysis
Investment Decision Analysis
A company invests $10,000 in a project that will return $10,500 in one year. Given a market interest rate of 6%, the project is considered profitable because the future payoff is greater than the initial investment.
Evaluating Investment Decision Criteria
Match each component of the future value investment profitability criterion,
X > I(1+r), with its correct economic interpretation.A company is considering a project with an initial investment of $20,000. The current annual market interest rate is 5%. To be considered profitable based on the future value criterion, the project's payoff in one year must be greater than $____.
A project manager approves a one-year project requiring a $50,000 initial investment with an expected payoff of $53,500. The manager's justification is that the project yields a 7% return. However, the prevailing market interest rate for investments of similar risk is 8%. Based on the principle of comparing a project's future payoff to the future opportunity cost of the investment, why is the manager's conclusion to approve the project flawed?
A company has sufficient capital to undertake only one of two mutually exclusive one-year projects. The current annual market interest rate is 5%.
- Project Alpha: Requires an $80,000 initial investment and has an expected future payoff of $85,000.
- Project Beta: Requires a $100,000 initial investment and has an expected future payoff of $104,500.
Based on the criterion that a project's future payoff must exceed the future opportunity cost of the investment, which action should the company take?
Implied Interest Rate for a Profitable Project