The Hudson Corporation makes an investment of $64,530 that provides the followin

Question

The Hudson Corporation makes an investment of $64,530 that provides the following cash flow:
Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods.

  
a. What is the net present value at a discount rate of 8 percent? (Do not round intermediate calculations and round your answer to 2 decimal places.)
  

b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
  

c. Would you make the same decision under both parts a and b?
  

Explanation / Answer

a. Net present value = [($31,000 x 0.926 + 31,000 x 0.857 + 19,000 x 0.794) - $64,530] = $5,829

b. Internal rate of return

Average inflow = $81,000 / 3 = $27,000

Present value factore = $64,530 / $27,000 = 2.390

c. No, Decision will be different in case of IRR due to higher than discount rate.

Using Appendix D for n= 3, the first approximation appears to fall between 12 percent and 14 percent. Since the heavy inflows are in the early years, we will try14 percent.

present value of inflow = $31,000 x 0.877 + 31,000 x 0.769 + 19,000 x 0.675 = $63,851

Since 14 percent is not high enough to get $64,530 as the present value, we will try12 percent

present value of inflow = $31,000 x 0.893 + 31,000 x 0.797 + 19,000 x 0.712 = $65,918

IRR= 0.12 + {0.02 / ( $65,918 - $63,851) * ($64,530 - $63,851) = 12.66%

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.