Answer :
At the rate 6.34% would be indifferent between these two projects.
Answer: Option A.
Explanation:
Rate of interest is the rate a bank or other loan specialist charges to obtain its cash, or the rate a bank pays its savers for keeping cash in a record. The yearly financing cost is the rate over a time of one year.
An interest rate is the level of chief charged by the bank for the utilization of its cash. The chief is the measure of cash credited. Since banks acquire cash from you (as stores), they likewise pay you a loan cost on your cash.
We can differentiate these two projects based on the Internal rate of return (IRR)method. Thus, the correct option will be D) -4.38 percent.
What do you mean by Internal Rate of return?
Internal rate of return (IRR) is a metric used in financial analysis to estimate potential investment returns.
IRR is the discount rate that makes the net present value (NPV) for all cash inflows and outflows equal to zero in the discounted cash flow analysis.
As per the information available:
We need to calculate the internal rate of return:
[tex]\rm\,Year \; 0 \; Difference \;= -\$40,000 - (-\$38,000) \\\\ \rm\,Year \; 0 \; Difference \;= -\$2,000\\\\ Year \; 1 \;Difference = \$21,200 - \$25,500 \\\\Year 1 Difference = -\$4,300\\\\ Year \; 2 \;Difference = \$16,800 - \$25,500 \\\\Year \; 2 \;Difference = -\$8,700\\\\ Year \; 3 \;Difference = \$14,000 - \$0\\\\ Year \;3 \;Difference = \$14,000\\\\[/tex]
[tex]\rm\,NPV = 0 - \dfrac{4,300}{1 + IRR} - \dfrac{8,700}{(1 + IRR)^{2}}-\dfrac{14,000}{(1 + IRR)^{3} }\\\\Where, NPV = 0,\\IRR = -0.0438\\\\IRR = -4.38\%[/tex]
Hence, IRR is equal to -4.38%. Option D. is the correct choice.
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