Turner Video will invest 64500 in a project. The firms cost of capital is 6% The

Question

Turner Video will invest 64500 in a project. The firms cost of capital is 6% The investment will provide the following inflows.

1-18,000

2-20,000

3-24,000

4-28,000

5-32,000

a- If the reinvestment of the net present value method is used what will be the total value of inflows at the end of five years. (assume inflows come at the end of the year)

b-If the firm is able to earn 10% on reinvesment funds what will be the total value of inflows after five years?

c-Which investment assumption is better?

Explanation / Answer

a|) 18000/1.06 +20000/1.06^2 + 24000/1.06^3 +28000/1.06^4 +32000/1.06^5 = 101022.80778

b) 18000/1.1 +20000/1.1^2 + 24000/1.1^3 +28000/1.1^4 +32000/1.1^5 = 89917.976

c) a is better as it higher value of inflows

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