High Flying Company has an opportunity to make an investment that will yield $1,

Question

High Flying Company has an opportunity to make an investment that will yield $1,000 net cash inflow per year for the next 10 years. The investment will cost $6,000 and will have no salvage value. After cost reductions and depreciation related to the new investment, the future average annual net income will increase $800. Calculate the Internal Rate of Return. Which one of the following investment opportunities would be rejected by a company that accepts all projects with net present values greater than zero? (These have already been discounted) Present value of inflows $35,740; present value of outflows $32,023. Present value of inflows $452,800; present value of outflows $450,020. Present value of inflows $125,114; present value of outflows $120,843 Present value of inflows $125,114; present value of outflows $126,843 Present value of inflows $125,114; present value of outflows $125,843.

Explanation / Answer

Part 1)

NPV= {Period Cash Flow / (1+R)^T} - Initial Investment

where R is the interest rate and T is the number of time periods. IRR is calculated using the NPV formula by solving for R if the NPV equals zero.

0= 1000(PVAF @r% for 10 years) -6000

IRR = 10.56%

it has been calculated using PVAF table

Part 2)

Net Present Value (NPV) is the difference between the present valueof cash inflows and the present value of cash outflows.

so for a) NPV = 35740-32023= 3717

b)452800-450020=2780

c)125114-120843=4271

d)125114-126843= -1729

e) 125114-125843=-729

as company selects projects with positive NPV a), b), c) will be selected and rest will be rejected.

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

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