Question

Michelle Martelle, CEO of Michelle Enterprises, has five projects in hand and is considering which, if any, to undertake. Their expected returns are: project A = 12 percent, project B = 7 percent, project C = 10 percent, project D = 9 percent, and project E = 8 percent. If the interest rate is 8.5 percent, which, if any, investment projects will she accept?A. Only project A.
B. Projects A and C.
C. Projects A, C and D.
D. Projects A, C, D and E.
E. Projects A, B, C, D and E.

Answer 1

Answer:

C) Projects A, C and D.

Explanation:

• project A = 12 percent ≥ 8.5%
• project B = 7 percent ≤ 8.5%
• project C = 10 percent ≥ 8.5%
• project D = 9 percent ≥ 8.5%
• project E = 8 percent ≤ 8.5%

If you are going to evaluate which projects to invest in based on their expected returns, then you should choose only those ones that have expected returns higher than 8.5% which is your discount rate. Projects with expected returns lower than 8.5% must be rejected.