Roger Industries is considering two capital investment proposals. Estimates rega

Question

Roger Industries is considering two capital investment proposals. Estimates regarding each project are provided below: Project XR8 Project AAA Initial investment $800,000 $1,200,000 Annual net income 40,000 84,000 Net annual cash inflow 200,000 284,000 Estimated useful life 5 years 6 years Salvage value 0 0 The company requires a 10% rate of return on all new investments. Present Value of an Annuity of 1 Periods 9% 10% 11% 12% 5 3.890 3.791 3.696 3.605 6 4.486 4.355 4.231 4.111 The annual rate of return for Project XR8 is A. 25%. B. 50%. C. 10%. D. 5%.

Explanation / Answer

800000 =200000 /r *(1-1/(1+r)^5)x

implies r = 8% annual rate of return

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