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Chapter 4: Q7DQ (page 405)

If a corporation has projects that will earn more than the cost of capital, should it ration capital? (LO12-5)

Short Answer

Expert verified

Answer

The business entity must not ration its capital.

Step by step solution

01

Definition of Internal Rate of Return

A rate of return that defines the profitability of the initial investment made by the business entity is known as the internal rate of return. It is calculated using the same formula as NPV is calculated.

02

Project earnings more than the cost of capital

From the financial point of view, the project must not be accepted, and the business must not ration capital. The business entity will be able to increase its profitability and wealth at the point where the marginal cost of investment equals the marginal return

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