EX 10-19 Net present value method and internal rate of return method for a servi
ID: 2494222 • Letter: E
Question
EX 10-19 Net present value method and internal rate of return method for a service company Buckeye Healthcare Corp. is proposing to spend $I86,725 on an eight-year project . that has estimated net cash flows of $35,000 for each of the eight years. Compute the net present value, using a rate of return of 12%. Use the present value of an annuity of $1 table in the chapter. Based on the analysis prepared in part(a), is the rate of return (1) more than 12%,(2)12%, or (3) less than 12%? Explain Determine the internal rate of return by computing a present value factor for an annuity $1 and using the present value of an annuity of $1 table presented in the text.Explanation / Answer
a.
Present value of annual cash flows = $35,000 * (1 - 1.12-8)/0.12 = $35,000 * 4.9676 = $173,866
Net present value = - $186,725 + $173,866 = -$12,859
b.
Using the rate of return 12%, the NPV is negative. Hence, the actual rate of return of the proposal is less than 12%.
c.
At IRR,
Present value of annual cash inflows = Initial outflow = $186,725
Solving for IRR, we get IRR = 10%
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