You wish to evaluate a project requiring an initial investment of $45,000 and having a useful life of 5 years. What minimum amount of annual cash inflow do you need if your firm has an 8% cost of capital? If the project is forecast to earn $12,500 per year over the 5 years, what is its IRR? Is the project acceptable?
Like most firms in its industry, Yeastime Bakeries uses a subjective risk assessment tool of its own design. The tool is a simple index by which projects are ranked by level of perceived risk on a scale of 010. The scale is recreated in the following table.
Risk Index Required Return
0 4.0%(current risk-free rate)
1 4.5
2 5.0
3 5.5
4 6.0
5 6.5(current IRR)
6 7.0
7 7.5
8 8.0
9 8.5
10 9.0