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P has decided to invest in a new warehouse at a cost of $2,000,000. The discount rate of the project is18% and the present value of the tax shield is 26,000.
What is the minimum acceptableInternal Rate of Return of the project?
Suggested Answer: B, C, D
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31 comments · newest first
QU
Quentin
11 months ago
17.77% seems too precise to be right.
KA
Kasandra
11 months ago
Wait, how does the tax shield affect this?
RO
Roxane
11 months ago
I think it might be a bit lower than 18%.
KA
Kanisha
12 months ago
Definitely going with option A!
GA
Gabriele
12 months ago
The discount rate is 18%, so IRR should be at least that.
MA
Martha
12 months ago
I vaguely recall that the tax shield can affect the IRR, but I can't remember how to factor that into the calculation. This is tricky!
HU
Huey
1 year ago
I feel like I saw a similar question in our practice exam, and it had a slightly different IRR calculation. I might be leaning towards option C, but I'm not entirely confident.
TE
Tess
1 year ago
I think the minimum acceptable IRR is supposed to be at least equal to the discount rate, which is 18%. So maybe option A?
XU
Xuan
1 year ago
I remember we discussed how the IRR should be compared to the discount rate, but I'm not sure how to calculate it exactly in this case.
NO
Noemi
1 year ago
Okay, let me think this through. The discount rate is 18%, but the present value of the tax shield is $26,000. That means the actual IRR must be higher than 18% to make the project worthwhile. I'm going to try to calculate the exact minimum IRR.
LI
Lisbeth
1 year ago
I'm a little confused here. The question is asking for the minimum acceptable IRR, but the discount rate is also 18%. Are those the same thing, or am I missing something?
FL
Florencia
1 year ago
I've got this! The discount rate is 18%, and the present value of the tax shield is $26,000. So the minimum acceptable IRR must be 18%, right?
CO
Cordelia
1 year ago
Hmm, this looks tricky. I'm not totally sure how to approach this, but I'll give it my best shot. Maybe I can work backwards from the discount rate and tax shield information.
VI
Vivienne
1 year ago
Okay, let's think this through step-by-step. We need to find the minimum acceptable Internal Rate of Return (IRR) for this project, given the discount rate and present value of the tax shield.
MA
Maira
1 year ago
Wait, did you guys remember to account for the fact that the warehouse is made of bricks and mortar? That should definitely affect the IRR. *scratches head* Anyway, I'm sticking with B) 17.77%.
IZ
Izetta
1 year ago
Hmm, I'm not so sure. Shouldn't the minimum acceptable IRR be lower than the discount rate? I'll go with D) 16.50%.
ME
Melissia
1 year ago
Let's go with D) 16.50% then.
AR
Ardella
1 year ago
I'm not sure, but I think D) 16.50% makes sense.
CO
Cordelia
1 year ago
I agree, I think D) 16.50% is the correct option.
AN
Antonio
1 year ago
I think the minimum acceptable IRR should be lower than the discount rate.
DO
Dominga
2 years ago
Hold on, if the present value of the tax shield is $26,000, that should be factored into the equation as well. I'm going with C) 18.23%.
PH
Phuong
1 year ago
I agree, C) 18.23% seems like the correct choice considering the present value of the tax shield.
TA
Tammara
1 year ago
I think you're right, the present value of the tax shield should be considered. I also choose C) 18.23%.
LE
Lenna
2 years ago
I agree with Magnolia, the present value of the tax shield should be considered in determining the minimum acceptable Internal Rate of Return.
MA
Magnolia
2 years ago
I disagree, I believe it should be 17.77% because of the present value of the tax shield.
OL
Oliva
2 years ago
I think the answer is B) 17.77%. The discount rate is 18%, so the minimum acceptable Internal Rate of Return should be slightly lower than that.
VE
Verdell
1 year ago
I'm not sure, but I think it's D) 16.50% because the project cost is quite high and might affect the minimum acceptable Internal Rate of Return.
RO
Rosina
1 year ago
I see your point, but I still think it's B) 17.77% because the discount rate is the main factor in this calculation.
HI
Hillary
1 year ago
I think it's actually C) 18.23%, because the present value of the tax shield is also a factor in determining the minimum acceptable Internal Rate of Return.
DO
Dominga
1 year ago
I agree with you, the answer is B) 17.77%
VO
Von
2 years ago
I think the minimum acceptable Internal Rate of Return should be 18%.