Vanessa Company is evaluating a project requiring a capital expenditure of $480,
ID: 2481109 • Letter: V
Question
Vanessa Company is evaluating a project requiring a capital expenditure of $480,000. The project has an estimated life of 4 years and no salvage value. The estimated net income and net cash flow from the project are as follows: The company's minimum desired rate of return for net present value analysis is 15%. The present value of $1 at compound interest of 15% for 1, 2, 3, and 4 years is 0.870, 0.756, 0.658, and 0.572, respectively. Determine the following: The average rate of return on investment, using straight-line depreciation The net present value $Explanation / Answer
Average rate of return = Average Accounting Profit/Initial Investment
Depreciation = 480000/4 = $120000
Average Profit =Net Income -depreciaiton = 240000-120000 = $120000
Average rate of return = 120000/480000 = 25%
The Net Present value
= 210000x0.870+200000x0.756+160000x0.658+150000x0.572 - 480000
=182700+151200+105280+85800-480000
=524980 - 480000 =$44980
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