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Future Value Formulation of the Investment Profitability Criterion
The investment profitability criterion, expressed as , is based on comparing future values. It stipulates that a project should be undertaken only if its future return, , exceeds its future opportunity cost. This opportunity cost, represented by , is the amount the company would have in the future if the initial investment, , had been placed in an alternative investment earning the market interest rate, .
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A manufacturing firm is considering a one-year project that requires an initial investment of $10,000. The project is expected to yield a total return of $10,800 at the end of the year. The current annual market interest rate is 5%. Based on the investment profitability condition, should the firm undertake this project, and why?
Analyzing Investment Profitability Conditions
A firm is considering a one-year project that requires an initial outlay of $50,000 and is expected to generate a total return of $53,000 at the end of the year. The firm will only undertake projects where the future return is strictly greater than the future opportunity cost of the initial investment. Above which of the following market interest rates would this project no longer be considered a profitable venture?
A company is evaluating a one-year project with an initial cost of $200,000 and an expected future return of $212,000. The company will only proceed if the project's future return is greater than the future value of the initial investment had it been placed in a financial asset. In which of the following economic scenarios would the company decide to undertake the project?
A financial analyst argues that a one-year project is profitable simply because its expected future return ($104,000) is greater than its initial cost ($100,000). This reasoning is correct, and the project should be undertaken even if the prevailing market interest rate is 5%.
A company is evaluating a potential one-year project that requires an initial investment of $80,000. The current annual market interest rate, which represents the return on the next best alternative investment, is 6%. According to the investment profitability condition, what is the minimum future return the project must generate for the company to consider it a worthwhile venture?
A firm analyzed a one-year investment opportunity with an initial cost
Iand an expected future payoffX. After considering the current market interest rater, the firm decided to reject the project. Based on the investment profitability condition, which of the following relationships must be true?Impact of Interest Rate Changes on Investment Decisions
A manufacturing firm has $500,000 available to invest in a single, one-year project. The current annual market interest rate is 4%. The firm will only choose a project if its future return is strictly greater than the future opportunity cost of the initial investment. Given the following mutually exclusive options, which one represents the firm's best course of action?
Equivalence of Future Value and Present Value Investment Criteria
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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