The rate of return a company is required to earn on any inve

The rate of return a company is required to earn on any investment in order to maintain the market value of its stock.

Select one:

a. internal rate of return

b. gross profit margin

c. cost of capital

d. net present value

You are given the following cash flows. If you assume a 14.5 percent required return, what is the profitability index?

Year 0 -$46,500
Year 1 $12,200
Year 2 $38,400
Year 3 $11,300

Select one:

a. 0.94

b. 0.98

c. 1.02

d. 1.06

e. 1.11

Solution

1. Option \"C\" is correct, i.e., Cost of Capital

whereas,

Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project

zero. In other words, it is the expected rate of return that will be earned on a project or investment.

Gross profit margin is a profitability ratio that calculates the percentage of sales that exceed the cost

of goods sold.

Net Present Value (NPV) is the value of all future cash flows (positive and negative) over the entire

life of an investment discounted to the present.

2. PI = PV of Future Cash Flows / Initial Investment

= [($12,200/1.145) + ($38,400/1.145²) + ($11,300/1.145³)] / $46,500

= [$10,655.02 + $29,290.06 + $7,527.69] / $46,500 = $47,472.78 / $46,500 = 1.2

Hence, Option \"C\" is correct.