Use the data below to answer questions 24-26. Initial Investment Required $600,0
ID: 2529622 • Letter: U
Question
Use the data below to answer questions 24-26.
Initial Investment Required
$600,000
Est. Cash Salvage Value
$50,000
Est. Annual Cash Inflows
$400,000
Est. Annual Cash Outflows
$240,000
Discount Rate
15.0%
Company A Useful Life
6 Yrs
24. The net present value is:
a. -$15.639 c. $27,134
b. $21,669 d. None
25. The internal rate of return is:
a. 16.61% c. 21.78%
b. 24.33% d. None
26. The payback period is:
a. 3.75 Years c. 6.50 Years
b. 5.00 Years d. None
Initial Investment Required
$600,000
Est. Cash Salvage Value
$50,000
Est. Annual Cash Inflows
$400,000
Est. Annual Cash Outflows
$240,000
Discount Rate
15.0%
Company A Useful Life
6 Yrs
Explanation / Answer
24.
Therefore the option is C, $27134.
25. Internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. NPV is $27134 @ 15%. For NPV to become zero, IRR will be somewhere around 15%-16%. Using trail and error method, IRR is calculated as follows:
IRR = 15% + (605472 - 600000) / (605472 - 589504) x (16% - 15%)
= 15% + ( 5472 / 15968 ) x 1%
= 15.3439%. Hence option is D, NONE
26.
Pay back period = Initial Investment / Net annual cash inflow
= 600000 / (400000-240000)
= 600000 / 160000
= 3. 75 years. Therefore the option is A.
Particulars PVAF( 15%,6 yrs) Present Value Estimated Cash inflows 400000 Estimated Cash outflows 240000 Net cash inflow 160000 3.7845 605518 A Present value of Salvage value 50000 0.4323 21616 B Present value of cash inflows (A+B) 627134 Less: Cost of investment(cash outflow) 600000 Net present value 27134Related Questions
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