2D2G HOBART CORPORATION EVALUATES CAPITAL PROJECTS USING A VARIETY OF...

331.

CSO: 2D2b

LOS: 2D2g

Hobart Corporation evaluates capital projects using a variety of performance screens;

including a hurdle rate of 16%, payback period of 3 years or less, and an accounting rate

of return of 20% or more. Management is completing review of a project on the basis of

the following projections.

•

Capital investment

$200,000

•

Annual cash flows

$74,000

•

Straight-line depreciation

5 years

•

Terminal value

$20,000

The projected internal rate of return is 20%. Which one of the following alternatives

reflects the appropriate conclusions for the indicated evaluative measures?

Internal Rate

of Return

Payback

a.

Accept

Reject.

b.

Reject

Reject.

c.

Accept

Accept.

d.

Reject

Accept.